Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.
week-day daily “Checkpoint Newsstand” from Thomson Reuters recently provided a
good summary of some important tax developments that have occurred in the past three
months that affect taxpayers, their investments, and their livelihood.
have provided some of TR’s summary below, with my own wording replacing theirs
in several places, and including some of my own personal comments.
Donald T Rump Administration and select members of Congress have released a
"unified framework" for tax reform. The official framework document leaves
many specifics to be worked out by the tax-writing committees (i.e., the House
Ways and Means Committee and the Senate Finance Committee).
the standard deduction to $24,000 for married taxpayers filing jointly, and
$12,000 for single filers;
the personal exemption and the additional standard deductions for older/blind
the number of tax brackets from seven to three: 12%, 25%, and 35%;
the child tax credit;
the individual alternative minimum tax;
eliminate itemized deductions, but retain the home mortgage interest and
charitable contribution deductions;
both the estate tax and the generation-skipping transfer tax;
a maximum 25% tax rate for "small" and family-owned businesses
conducted as sole proprietorships, partnerships and S corporations;
the corporate tax rate to 20% (down from the current top rate of 35%);
full expensing for five years;
limit the deduction for net interest expense incurred by C corporations;
most deductions and credits, but retain the research and low-income housing
special tax rules that apply to certain industries and sectors;
a 100% exemption for dividends from foreign subsidiaries; and
protect the U.S. tax base, tax the foreign profits of U.S. multinational corporations
at a reduced rate and on a global basis.
mentioned above, the actual details on these proposals have still not yet been
determined.As it is so late in the year
it is, in my opinion, doubtful that substantive tax reform legislation will be
passed before year-end.In any case, I
do not expect any legislation to affect the 2017 Form 1040.
September 29, the "Disaster Tax Relief and Airport and Airway Extension
Act of 2017" (P.L. 115-63) was signed into law. The Act provides temporary
tax relief to victims of Hurricanes Harvey, Irma, and Maria.
for individuals includes, among other things, loosened restrictions for
claiming personal casualty losses, tax-favored withdrawals from retirement
plans, and the option of using current or prior year's income for purposes of
claiming the earned income and child tax credits.
that qualify for relief may claim a new "employee retention tax
credit" of 40% of up to $6,000 of "qualified wages" paid by
employers affected by Hurricanes Harvey, Irma, and Maria (for a maximum credit
of $2,400 per employee).
addition to the new law, IRS has granted specific administrative hurricane
relief, for example, extending various deadlines, encouraging leave-based
donation programs for hurricane victims, and allowing retirement plans to make
July 28, the Treasury Department announced that it would begin winding down the
myRA (my Retirement Account) program—a type of government-administered Roth IRA
initially offered by Treasury beginning in 2014. Noting that demand for and
investment in the myRA program had been extremely low, Treasury stated that it
would phase out the program over the following months.
myRA program will no longer accept new enrollments, but existing accounts will
to remain open and accessible, so that individuals could continue to manage
their accounts until further notice. Individuals can make deposits, and their
accounts would continue to earn interest. Funds in myRA accounts remained in an
investment issued by the Treasury Department.I was personally sorry to see this program go.
government announced a simplified per-diem increase for post-Sept. 30, 2017
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&E). If the rate paid doesn't
exceed the 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. 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.
IRS released the "high-low" simplified per-diem rates for post-Sept.
30, 2017, travel. Under the optional high-low method for post-Sept. 30, 2017
travel, the high-cost-area per diem is $284 (up from $282), consisting of $216
for lodging and $68 for M&IE. The per-diem for all other localities is $191
(up from $189), consisting of $134 for lodging and $57 for M&IE.
Apparently an honest mistake is no excuse for incorrectly claimed advance
premium tax credit.The Tax Court ruled
that taxpayers who didn't qualify for the premium tax credit under the
Affordable Care Act (Obamacare) because their modified adjusted gross income
exceeded 400% of the federal poverty level had to repay all the advance premium
tax credit paid on their behalf to their insurer.
sympathetic Tax Court noted that while their state health insurance Marketplace
may have incorrectly informed the taxpayers that they were eligible for the
credit for 2014, the Court's hands were tied by the Code and regulations. The
simple fact was that the taxpayers' income exceeded eligible levels and that
they had to repay the advance premium tax credit payments.
you have any questions on how the above developments will affect you I suggest
you consult your, or a, tax professional.You can begin your search for a tax professional at my website FIND ATAX PROFESSIONAL.
According to the cocktail napkin
scribblings that is the “framework” for tax reform currently being touted by
arrogant demagogue Donald T Rump, one of the very few itemized deductions that
will remain will be the deduction for home mortgage interest.
I do believe that the deduction for
acquisition debt interest (but not home equity debt interest) for a taxpayer’s
primary principal residence should be kept (as well as the deduction for state and local income and property taxes).
Not to support the housing market, but as part of an attempt at “geographical
What do I mean?Americans are taxed based on income measured
in pure dollars.But the “value” of
one’s level of income differs, sometimes greatly, based on one’s geographical
location.A family living in the northeast
(New York, New Jersey, Massachusetts, and Connecticut) or California with an
income of $150,000 may be just getting by, while a similar family that resides
in “middle America” lives like royalty on $150,000. Many components of the Tax
Code are indexed for inflation, but nothing is indexed for geography.
It costs an awful lot to live in the
northeast and California. State and local income and property taxes are the
highest in the country. The cost of real estate is also excessively high, and
so acquisition debt is higher. As a result, one must earn a lot more money to
be able to live in these states – and so salaries are arbitrarily increased to
reflect the higher cost of living.Since
we pay taxes on “net income” after deductions, allowing an itemized deduction
for these items would help to somewhat geographically equalize the tax burden.
In my opinion, the current deduction
for mortgage interest – both on Schedule A and Form 6251 (Alternative Minimum Tax) is perhaps the area of
the Tax Code where proper documentation and strict adherence to the law is
the most overlooked (or actually ignored).
Let’s take a look at the current
deduction for mortgage interest.
“Qualified residence interest” on debt
secured by a residence, aka mortgage interest, that is paid on your primary and
secondary residences may be deductible on Schedule A.But just how much can you deduct?It depends.
There are three types of qualified
residence interest debt -
1) Grandfathered debt – debt acquired
on or before October 13, 1987, that was secured by a main residence or a
qualified second home.It does matter
what the proceeds of the loan were used for, as long as the debt was secured by
the property.The interest deduction is
not limited.Interest on grandfathered
debt is deductible in full as mortgage interest.
2) Acquisition debt - debt acquired
after October 13, 1987, that was used to buy, build, or substantially improve a
main residence or a qualified second home. A “substantial improvement” is one
that adds value to the home, prolongs the home’s useful life, or adapts the
home to new uses.You can deduct the
interest on up to $1 Million in principal ($500,000 if Married Filing
Separately). Qualified acquisition debt cannot exceed the cost of the home and
any substantial improvements.
3) Home equity debt – debt acquired
after October 13, 1987, that is secured by a main residence or a qualified
second home that is not used to buy, build, or substantially improve the
property.There is no restriction or
limitation on what the money can be used for; you can use it to buy a car, to
pay for college, or to pay down credit card balances.You can deduct the interest on up to $100,000
($50,000 if married filing separately).
Only grandfathered debt interest and
acquisition debt interest is deductible in calculating the dreaded Alternative Minimum
Tax (AMT).Home equity debt interest is
NOT deductible for AMT.
Taxpayers are required to keep separate
track of acquisition debt and home equity debt, to make sure that the deduction
on Schedule A does not include interest on debt principal that exceed the
statutory maximums, and to determine what interest deduction to add back on
Form 6251 when calculating Alternative Minimum Taxable Income.However, I firmly believe that 99.5% of
taxpayers do not do this.I do not know
of any taxpayer who does.And I expect
that the majority of tax preparers do not do this for their taxpayer clients.
The cocktail napkin scribblings do not
indicate if the entire current deduction for mortgage interest – both acquisition
debt and home equity debt – or the current limitations based on debt principal will
I have created a MORTGAGE INTEREST
GUIDE.In it I explain just about
everything you need to know about deducting qualified residence interest on
your Form 1040.It includes two worksheets
– one for Acquisition Debt Activity and one for Home Equity Debt activity – and
a detailed example of how to use the worksheets.
My MORTGAGE INTEREST GUIDE is only
$2.00 delivered as a pdf email attachment - or $3,00 for a print version sent
via postal mail.Order your copy by
sending your check of money order payable to TAXES AND ACCOUNTING, INC, and
your email or postal address, to -
TAXES AND ACCOUNTING, INC
MORTGAGE INTEREST GUIDE,
POST OFFICE BOX A
HAWLEY PA 18428
So, what are your thoughts on the
deduction for mortgage interest?
* Have you ever
thought about becoming a professional tax preparer? If the answer is yes you
should check out my book SO YOU WANT TO BE A TAX PREPARER.Click here to read a review.And click here to order a copy in e-book
format you can read on Kindle.
* I have talked often about how ending the
federal Estate Tax might result in the end of the step-up in basis of inherited
assets, which would be a total disaster for tax preparation.Daniel
Berger suggests another result from eliminating the “death tax” in “The Unintended Consequences of Killing the Estate Tax” at TAX VOX, the blog of the
Tax Policy Center -
there are other considerations to repealing the estate tax. One is that many
wealthy people use charitable giving while alive or through bequests to reduce
or eliminate their estate tax liability. In the mid-1940s the bequests of Henry
Ford’s sons made the Ford Foundation the largest philanthropy in the world, and
in 2014 businessman Ralph Wilson Jr. left $1 billion to his charitable
foundation. In 2015, charitable bequests amounted to around $20 billion
it is not possible to know how the estate tax affected any individual bequest,
nor should the generosity of these gifts be minimized, there is evidence to
suggest that the existence of an estate tax does effect decisions to leave
charitable bequests and increases lifetime giving.
economics are relatively simple. Each dollar bequest to charity lowers the size
of the taxable estates by a dollar, and reduces the amount of estate tax
liability by as much as 40 cents. Eliminating the estate tax would make leaving
money to charity more “expensive”, compared to current law. The same logic
follows with lifetime giving. If a high-income household claims an itemized
deduction for a charitable contribution on its income tax, the gift will lower
its current tax bill and at the same time the contribution will reduce the
amount of money that might eventually be subject to the estate tax.”
This is certainly something to think about
when evaluating the fate of the Estate Tax.I have not been a fan of the Estate Tax, but to be honest, at current
levels it only affects at most 2 or 3 of my clients.
triggering higher inflation in August and September, the storms may have
boosted the expected increase in benefits in 2018 by the most in six years. The
annual COLA, or cost-of-living adjustment, could be as much as 2% versus the
1.6% to 1.8% increase that seemed likely a few months ago.”
* FORBES.COM’s TaxGirl Kelly Phillips Erb
deals with a little-understood tax form in her “Ask the TaxGirl” post “Should I Cancel A Form W-9?”
— tax professionals and all us individual taxpayers — should be cautious when
we receive any tax or financial-related unsolicited emails.”
I personally never “open” an email from an
address I do not know.I do sometimes
miss legitimate emails from clients and their representatives whose email
addresses are not familiar to me – but it is more better to miss an email than
to FU your computer or open yourself up to identity theft.
I also know that email addresses can often be
hacked, as mine has been on occasion, so I use either the subject line as a
guide to determine if I will open an email from a client, or evaluate the
“body” of the actual email before clicking on any links.
that a ruling by the Seventh Circuit Court of Appeals would apply to ministers in that circuit, which includes the states of
Illinois, Indiana, and Wisconsin. It would become a national precedent
binding on ministers in all states if affirmed by the United States Supreme
Court--an unlikely outcome because the Supreme Court accepts less than 1
percent of all appeals. Note, however, that the IRS would have the discretion
to follow or not follow an eventual ruling by the appeals court nationally to
promote consistency in tax administration.”
So, this decision does not directly affect my client in Maryland yet.But the “fat lady has not sung” yet – and
there may be further developments on this issue in the future.
it comes to time to actually use the money you’ve saved, be sure that you know
the laws and are utilizing your 529 savings in the most efficient way possible.
If you have specific questions, it never hurts to speak to an accountant that’s
familiar with 529 plans.
your college savings work for you!”
* FREE! FREE! FREE! New tax e-newsletter -
TAX TOPICS.Check it out!
doing away with all itemized deductions except mortgage interest and charitable
contributions, as it is thought the “framework” for tax reform does, would
certainly simplify the Tax Code, it would, in some instances, be unfair.
look at the deduction for “employee business expenses”.
employers have established an “accountable” plan for reimbursing employees for
these expenses.If an employee incurs a
legitimate job-related out-of-pocket expense he/she submits proof of payment to
the employer and is reimbursed.
others, especially outside commission salesmen, are not reimbursed for the
expenses incurred to generate sales.The
employer pays the employee a draw and a commission based on sales volume.The employee is expected to “eat” his out of
pocket expenses, which could be extensive in terms of business miles, meals and
entertaining, and promotional expenses.
the case of the reimbursed employee, his net salary is, in effect, all “in-pocket”.In the case of the unreimbursed employee his
net “in pocket” is his net salary less his unreimbursed expenses.And the salary of the unreimbursed employee
is usually higher due to the “unreimbursementness”.The unreimbursed employee is being more
highly taxed than the reimbursed employee.
the commission salesman was self-employed instead of an employee he/she would
be able to deduct in full all related expenses, and pay tax, income and
payroll, on the true “in pocket”.
the unreimbursed employee can claim a tax deduction for his/her expenses on
Schedule A, although this is limited by the 2% of AGI exclusion for “miscellaneous”
expenses.FYI, back when I started in “the
business” (early 1970s) outside salesmen could deduct unreimbursed expenses as
an “Adjustment to Income”.
the other hand, allowing employees a deduction for business automobile expenses
that includes depreciation is perhaps excessive and unfair.
the most part taxpayers who use their car for business, other than commuting,
would own a car whether or not one was needed for business. The business use,
however extensive, is basically secondary to personal use.I own a car. I have always owned a car.Although a large percentage of my current
driving is business related (because since I work out of a home office I have
no “commute”), I own the car primarily for personal and not business reasons,
and would own a car whether it was needed for business or not.
the standard mileage rate for business is calculated using an annual study of
fixed and variable costs of operating an automobile - including insurance,
repairs and maintenance, tires, gas and oil, and depreciation. For example, the
2016 business standard mileage rate of 54 cents per mile included 24 cents
allocated to depreciation.
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 probably insurance.
to be more representative of the actual out of pocket business expense the 2016
standard mileage allowance should have been 30 cents per mile – the 54 cents
less the 24 cents for depreciation.This
would apply on both Form 2106 and Schedule C.
the case of motor vehicles used 100% in a business, a deduction would be allowed for 100% of the
actual costs of maintaining and operating the vehicle, including depreciation. In
this situation perhaps the standard mileage allowance should not be allowed.
Every person has a unique tax situation.No two tax returns are the same.Your situation is different from other taxpayers.Not every question has the same answer for
every taxpayer.The actual correct
answer to just about every tax question, except “Should I cheat?” – is “It
Now, on to the BUZZ.
* Leandra Lederman
makes some very good points about the alleged “IRS Scandal”, which TAX PROF
Paul Caron tells us in now in its 1600+ day (I agree with fellow blogger Peter
J Reilly that the Professor has most certainly “jumped the shark” with this
blog post series) in “The Real IRS Scandal” at the SURLY SUBGROUP blog -
“The fact that IRS employees were using keywords to identify progressive
as well as conservative organizations doing too much political activity to
qualify under 501(c)(4) should have been clear to anyone who dug into the
public documents. But it wasn’t the message that the House Oversight
Committee–and thus many media stories–disseminated. The real scandal was the
damage the resulting witch hunt did to the IRS.”
There was no IRS scandal.IRS employees were doing their “due
diligence” in investigating the organizations applying for 501(c)(4) status
(organizations “for the promotion of social welfare”).Tea party related organizations should have
been closely investigated, as well as more “politically liberal” organizations,
which also were.
The unacceptable and
inappropriate act was not by the IRS, but by the idiots in Congress who
continually underfund the IRS as “punishment”.
PDA is correct when he says, “It’s important for your overall financial
well-being to understand your taxes,” even if you use a tax professional to
prepare your return.I have said for
years that the more informed you are on
taxes the better prepared you will be when you see your preparer at tax time.A good reason to “subscribe” to THE WANDERING
TAX PRO (see upper right-hand margin).
* This week’s Monday post at THE TAX
PROFESSIONAL asks “Is Silence Golden?”.Be sure to return there on Wednesday for an interview with the President
In the post the Professor also exposes
arrogant Trump’s obvious “pants on fire” lie that the “plan” does not help him
rate cut helps him. Also, he likely holds his vast business operations in many
different types of entities including partnerships and S corporations and will
benefit from the top rate of 25% on such income even after paying himself
reasonable compensation. Also, if he is still carrying forward a net operating
loss, repeal of the AMT helps him. And repeal of the estate tax is a tremendous
tax cut for him.”
“ . . .
the IRS urges tax professionals and their clients — and all of us who do our
taxes on our own, too — to assume that some tax identity thief somewhere has
our personal and financial information should continue to monitor our accounts
and credit reports.”
* FREE! FREE! FREE! New tax e-newsletter -
TAX TOPICS.Check it out!
Most of you know that
in 45 years I have never used flawed and expensive tax preparation software to
prepare a tax return, and so have never electronically submitted a federal
return.It is not because I oppose
electronic filing – but because I cannot do so without using software.
The requirement is
that tax preparers must submit electronically returns that they “file”.The word “file” in this context means
“mail”.RWW is correct when he says in
the below post-
“It’s still possible in some cases to file on paper by having your
preparer give you your return for filing.”
I have all my clients
sign a statement, which I keep with my file copy of the return, that says –
“I do not want to file my return electronically and choose to file my
return on paper forms.My preparer will
not file my return with the IRS.I will
file my paper return with the IRS myself.”
Before leaving for
Intuit David Williams, the IRS tax-preparer regulation “czar”, specifically
told me that what I was doing was ok – and that I did not have to submit my
returns electronically or include the Form 8948 with each return if the client
signed my statement.
THE LAST WORD
Everything I feared would
happen if arrogant demagogue Donald T Rump became President has come true.
Every single day the
idiot continues to prove that he was the worst possible candidate for President
– or for any elected official.