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This is a direct quote from a Press Release I received from the IRS today:

Washington – U.S. Treasury Secretary Steven T. Mnuchin issued the following statement today in response to comments he has received from his Yale Classmates and others.

“I am writing in response to my Yale Classmates and many other comments I have received urging me to “speak out”. I believe that your letter and these comments raise several important issues and misconceptions that I am prepared to address.

“First, I am proud to serve my country as the 77th Treasury Secretary at this critical time in our history, and I do so with a goal of taking actions to improve the economy for the benefit of all of our citizens. I believe that there is a great opportunity to simplify regulations, reform taxes, and generate millions of jobs through higher growth. Additionally I will use all the powers and resources of the Department of the Treasury’s Terrorism and Financial Intelligence units to combat and stop terrorist financing domestically and internationally. These are my most important priorities as Treasury Secretary. I was honored to travel to all parts of the country with the President during his campaign, be chosen by the President to be Treasury Secretary, and will continue to pursue his agenda.

“Second, with regard to the recent, horrible events in Charlottesville, I strongly condemn the actions of those filled with hate and with the intent to harm others. They have no defense from me nor do they have any defense from the President or this administration. As the President said in his very first comment on the events that were unfolding in Charlottesville, “[w]e all must be united and condemn all that hate stands for. There is no place for this kind of violence in America. Let’s come together as one.”

“Third, as someone who is Jewish, I believe I understand the long history of violence and hatred against the Jews (and other minorities) and circumstances that give rise to these sentiments and actions. While I find it hard to believe I should have to defend myself on this, or the President, I feel compelled to let you know that the President in no way, shape or form, believes that neo-Nazi and other hate groups who endorse violence are equivalent to groups that demonstrate in peaceful and lawful ways.

“Finally, as a Yale graduate and a member of what used to be known as Calhoun College (prior to its name change), I am familiar with the culture wars being fought in our country and the impact it is having on many people, with different views of how history should be remembered. Some of these issues are far more complicated than we are led to believe by the mass media, and if it were so simple, such actions would have been taken by other presidents, governors, and mayors, long before President Trump was elected by the American people.

“Our President deserves the opportunity to propose his agenda and to do so without the attempts by those who opposed him in the primaries, in the general election and beyond to distract the administration and the American people from these most important policy issues – jobs, economic growth, and national security.

“I hope you have a better perspective on my feelings on these issues. I don’t believe the allegations against the President are accurate, and I believe that having highly talented men and women in our country surrounding the President in his administration should be reassuring to you and all the American people. As long as I am Treasury Secretary I will do the best job I can for the American people and provide the best advice I can to the President.”
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According to the National Association of Enrolled Agents (NAEA): The Senate Healthcare Bill Makes its Appearance, at Least Initially, with a Thud
On Thursday, June 22nd, Senate Republicans released a draft bill to repeal and replace the Affordable Care Act (ACA). Among other changes, the draft bill would:

• Eliminate the individual mandate for obtaining health insurance coverage;
• Abolish the employer mandate for providing health insurance to employees;
• Align the existing tax credit structure to an individual or family’s age, income and geographic location like what is presently in place under the ACA;
• Eliminate the health insurance tax;
• Abolish the Medicare surtax by 2023; a nice break for the wealthy
• Repeal the Flexible Spending Account tax;
• Eliminate the 3.8 percent surtax on investment income; another break for the wealthy
• Abolish the Health Spending Account withdrawal tax;
• Eliminate the Chronic Care Tax;
• Abolish the Medicine Cabinet Tax;
• Repeal the tax on small businesses with indoor tanning services;
• Abolish the tax on prescription medicine;
• Repeal the tax on retiree prescription drug coverage;
• Eliminate the tax credits for plans that cover abortion;
• Delay the Cadillac tax until 2026;
• Change the age rating to 5:1, which would then permit insurers to charge older adults five times more than younger people for health care coverage. The current age band rating is 3:1. Yikes! This is scary for senior citizens
• Permit states to receive waivers to ignore certain coverage standards under the ACA to allow states to have more flexibility in deciding insurance rules for their state; however, states would not be able to opt out of regulations governing pre-existing conditions.
• Provide subsidies for those making up to 350 percent of the federal poverty line beginning in 2020. There is a 400 percent ceiling under ACA.

Senate Majority Leader Mitch McConnell (R-KY) would like to hold a vote on the bill next week. While Senate Republicans need 51 votes to pass the bill under reconciliation, they can only afford to lose two votes to pass the bill in the Senate. As of close of business today, five GOP Senators voiced their concerns and announced they would not support this version of the bill.

Looks like reverse Robin Hood. Breaks for the wealthy, taken from the elderly and the poor.

Not all tax scams are instigated by outsiders. Some normally honest folks succumb to the temptation to falsely inflate deductions or expenses on tax returns. Doing so may result in paying less than is owed or receiving a larger refund than is due. The majority of taxpayers file honest and accurate tax returns each year.

However, each year some taxpayers “fudge” their information. This is why falsely claiming deductions, expenses or credits on tax returns remains on the “Dirty Dozen” list of tax scams.

Taxpayers should think twice before overstating deductions such as charitable contributions, padding business expenses or including credits that they are not entitled to receive – like the Earned Income Tax Credit or Child Tax Credit.

Speaking of charitable contributions, fake charities are another item on the IRS’ list of tax scams for 2017. You are allowed a deduction only for donations to qualified 501 (c)(3) organizations. And make sure the organization is qualified. The IRS offers these basic tips to taxpayers making charitable donations:
• Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested, which can be used to verify their legitimacy through EO Select Check. It is advisable to double check using a charity’s EIN.

• Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers. Confirm that those soliciting a donation are calling from a legitimate charity.

• Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Tax-related Identity theft – with its related scams to steal personal and financial data from taxpayers or data held by tax professionals – also remains a top item on the Dirty Dozen list. It remains an ongoing concern even though progress is being made within the IRS to reduce these occurrences. Take steps to safeguard your personal and business financial information.
I’ve had so many calls from clients about getting aggressive and threatening phone calls by “someone at the IRS,” demanding payment of so-called outstanding tax liabilities. The source is criminals impersonating IRS agents attempting to scam you out of money and your banking information. This has been on the list for a few years now and these calls remain a major threat to taxpayers. According to the IRS, “During filing season, the IRS generally sees a surge in scam phone calls that threaten police arrest, deportation, license revocation and other things.” The IRS reminds taxpayers to guard against all sorts of con games that arise at any time and pick up during tax season.

“Don’t be fooled by surprise phone calls by criminals impersonating IRS agents with threats or promises of a big refund if you provide them with your private information,” said IRS Commissioner John Koskinen. “If you’re surprised to get a call from the IRS, it almost certainly isn’t the real IRS. We generally initially contact taxpayers by mail.”

Here’s what the IRS has to say about the Child Tax Credit. As with every tax code it is not cut and dried!

The Child Tax Credit is a tax credit that may save taxpayers up to $1,000 for each eligible qualifying child. Taxpayers should make sure they qualify before they claim it. Here are five facts from the IRS on the Child Tax Credit:

1. Qualifications. For the Child Tax Credit, a qualifying child must pass several tests:

• Age. The child must have been under age 17 on Dec. 31, 2016.
• Relationship. The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother or half-sister. The child may be a descendant of any of these individuals. A qualifying child could also include grandchildren, nieces or nephews. Taxpayers would always treat an adopted child as their own child. An adopted child includes a child lawfully placed with them for legal adoption.
• Support. The child must have not provided more than half of their own support for the year.
• Dependent. The child must be a dependent that a taxpayer claims on their federal tax return.
• Joint return. The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.
• Citizenship. The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
• Residence. In most cases, the child must have lived with the taxpayer for more than half of 2016.

2. Limitations. The Child Tax Credit is subject to income limitations. The limits may reduce or eliminate a taxpayer’s credit depending on their filing status and income.

3. Additional Child Tax Credit. If a taxpayer qualifies and gets less than the full Child Tax Credit, they could receive a refund, even if they owe no tax, with the Additional Child Tax Credit.
Because of a new tax-law change, the IRS cannot issue refunds before Feb. 15 for tax returns that claim the Earned Income Tax Credit (EITC) or the ACTC. This applies to the entire refund, even the portion not associated with these credits. The IRS will begin to release EITC/ACTC refunds starting Feb. 15. However, the IRS expects these refunds to be available in bank accounts or debit cards at the earliest, during the week of Feb. 27. This will happen as long as there are no processing issues with the tax return and the taxpayer chose direct deposit. Read more about refund timing for early EITC/ACTC filers.

4. Schedule 8812. If a taxpayer qualifies to claim the Child Tax Credit, they need to check to see if they must complete and attach Schedule 8812, Child Tax Credit, with their tax return. Taxpayers can visit IRS.gov to view, download or print IRS tax forms anytime.

5. IRS E-file. The easiest way to claim the Child Tax Credit is with IRS E-file. This system is safe, accurate and easy to use. Taxpayers can also use IRS Free File to prepare and e-file their taxes for free. Go to IRS.gov/filing to learn more.

All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
Additional IRS Resources:
• Publication 972, Child Tax Credit
• Instructions for Form 8812
• Interactive Tax Assistant Tool
• IRS Tax Map

Check out what the IRS says about the Earned Income Tax Credit:

The Internal Revenue Service wants working grandparents raising grandchildren to be aware of the Earned Income Tax Credit (EITC) and correctly claim it if they qualify.

The EITC is a federal income tax credit for workers who don’t earn a high income ($53,505 or less for 2016) and meet certain eligibility requirements. Because it’s a refundable credit, those who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund. The EITC could put an extra $2 or up to $6,269 into a taxpayer’s pocket.

Grandparents and other relatives care for millions of children, but are often not aware that they could claim the children under their care for the EITC. A grandparent who is working and has a grandchild who is a qualifying child living with him or her may qualify for the EITC, even if the grandparent is 65 years of age or older. Generally, to be a qualified child for EITC purposes, the grandchild must meet the dependency requirements.

Special rules and restrictions apply if the child’s parents or other family members also qualify for the EITC. Details including numerous helpful examples can be found in Publication 596, available on IRS.gov. There are also special rules, described in the publication, for individuals receiving disability benefits and members of the military.

Working grandparents are encouraged to find out, not guess, if they qualify for this very important credit. To qualify for EITC, the taxpayer must have earned income either from a job or from self-employment and meet basic rules. Also, certain disability payments may qualify as earned income for EITC purposes. EITC eligibility also depends on family size. The IRS recommends using the EITC Assistant, on IRS.gov, to determine eligibility, estimate the amount of credit and more.
Eligible taxpayers must file a tax return, even if they do not owe any tax or are not required to file. Qualified taxpayers should consider claiming the EITC by filing electronically: through a qualified tax professional; using free community tax help sites; or doing it themselves with IRS Free File.
Many EITC filers will get their refunds later this year than in past years. That’s because a new law requires the IRS to hold refunds claiming the EITC and the Additional Child Tax Credit (ACTC) until mid-February. The IRS cautions taxpayers that these refunds likely will not start arriving in bank accounts or on debit cards until the week of Feb. 27. Taxpayers claiming the EITC or ACTC should file as soon as they have all of the necessary documentation together to prepare an accurate return. In other words, file as they normally would.

Refunds for those claiming the EITC will be delayed until February 15.

The Internal Revenue Service will begin accepting electronically filed income tax returns on January 23, 2017. But more than likely, you will not receive all of your tax filing documents by that day. Employers and providers of all third party documents such as W2s, 1098s, and 1099s have until January 31 to mail these documents to recipients. Therefore, most Americans will not be ready to file until the first week in February.

The deadline for filing your 2016 income tax return is April 18, 2017. Of course, you may file for an extension to Monday, October 16, 2017 (the 15th falls on a Sunday, so the due date defaults to the next business day). Keep in mind that the extension is merely for time to file, not time to pay. The IRS expects all taxes to be paid by April 18. Beware! The penalties for failure to pay are 5% of the unpaid tax per month for a maximum of 25%. That can be incredibly expensive.

Legal entities such as C and S corporations, LLCs, partnerships, etc. now have new due dates. Check with your tax professional or visit www.irs.gov to find out when these returns are due.

If you are able to enjoy the Earned Income Tax credit, the Education credits (Lifetime or American Opportunity tax credit), the Additional Child tax credit or if you have been the victim of identity theft or use Form 8379 (injured spouse allocation), your refund will be held up until at least February 15 even if you file right out of the gate on January 23. These returns take additional verification and therefore more processing time.

There are a few updates to tax law that you should know:

  1. Beginning in 2016, educator expenses will include the cost of taking professional development courses. The maximum amount you can deduct on the face of the 1040 under Adjustments to Income is $250. It’s been that rate for many years. However, beginning in 2017, this amount will be adjusted for inflation. Any amounts in excess of $250 are deducted as an employee business expense on Schedule A if you are able to itemize.
  2. So many states are making the use of medical marijuana a legal activity. However, the federal government does not agree. Which means the IRS doesn’t either. For 2016 and the unforeseeable future, no medical deduction is allowed for the cost of any controlled substance, including medical marijuana.
  3. If you pay mortgage insurance premiums (PMI), the deduction has been extended through 2016. Unless extended by Congress it will not be deductible in 2017 and beyond.
  4. If you are low income and live in the state of California, you may enjoy the Earned Income Tax credit at the state level this year.
  5. There are 24 other tax provisions set to expire on December 31. As usual, Congress will decide at the last minute whether or not to extend them and allow them as tax deductions on your 2016 income tax return. Waiting until the last minute makes tax planning difficult at best!
  6. If you have foreign bank accounts with balances totaling $10,000 or more at any time during the tax year, you are required to file FBAR. The FBAR is due this year on April 15 rather than June 30 as in prior years. You can request an extension of time to file to October 15, 2017, however, it’s subject to approval.
  7. If you are considering converting from a traditional IRA to a ROTH IRA, you must do so before December 31 in order for it to be counted for the 2016 tax year.

There is plenty more to consider when it comes to your taxes. And there are many more changes than those listed above. Consult with your tax professional to find out if any tax law changes impact your situation. It is also advisable to consult with your tax advisor if you experienced any major life changes this year: marriage, divorce, sale of a home or other property, new job, move to a different state, etc. A tax planning session now can minimize shock on April 15.

Warning: the newest fraud attempt is a phony IRS letter – a CP2000. The CP2000 is a valid IRS letter that is sent to taxpayers who neglect to report certain pieces of income on their tax returns. The IRS picks up these items from third party reporting documents such as W2s, K-1s, and 1099s. Then via its matching program it checks to ensure this income has been reported. If it has not, its computer generates the CP2000 letter which includes a bill for recalculated taxes.

These fraudsters copied the IRS logo perfectly; they even use the same font in writing the bogus CP2000 letter. It looks completely legitimate. The letter tells you that you left off some income from your tax return. The tax liability is then recomputed and you are billed for the resulting tax, interest and possibly a penalty. The amount is relatively small – usually less than $500. You are directed to write a check “payable to the IRS” and mail it to a post office box. And this is exactly how you know the letter is phony. If the letter were real, you would be told to make out the check to the “Department of the Treasury” not the “IRS.” if you receive such a letter, take it to your tax pro and report it to the Internal Revenue Service by scanning it and attaching it an email addressed to phishing@irs.gov.

Bonnie Lee explains a 1031 Exchange in the Realized article “Is a Reverse 1031 Exchange Right For You?”. Check it out!

I received the following question:

Bonnie the news outlets are reporting that Trump may have gotten away with not paying taxes for 18 years. Is this a loophole or the IRS not doing there (sic) job?

Loophole. if you suffer a Net Operating Loss and it’s not absorbed in the current tax year, you can carry back the loss 2 years then carry forward any remainder into future years for up to 20 years. Little guy can do it too. So say you start a biz, and use up all your savings to get it off the ground but you don’t make any money for the first 5 years. in fact, your expenses exceed your income by say $50,000. But you have no other taxable income because you are living off withdrawals from your savings account and maybe your family is helping you out – none of that is taxable. So your income tax return shows negative income of $50,000. To encourage biz, the IRS allows for the carrying of that income back two years to when you were making money. You basically redo your tax return using form 1045 and subtract that $50,000 from the income for the two years prior and get a refund of the taxes you paid that year. if you don’t use up all the loss in that year (maybe you only made $30,000 that year so you have $20,000 leftover) then you keep carrying the loss to subsequent years until you use it up.
I would love to hear your opinion of this tax law. Write to me at bonnie@taxpertise.com.

 

Some Facts About Hilary’s 2015 Income Tax Return:

Hilary Clinton has made public her income tax returns. I’ve reviewed her 2015 income tax return which is filed jointly with her husband Bill Clinton. The Clinton’s derived most of their income from self-employment activities – speech making and book sales. Only a modest amount of income was earned from passive activities – interest. No dividends or capital gains. Therefore, they did not have the advantage of the capital gains rate. In fact, due to having to also pay the self-employment tax, their effective tax rate was 35.2%.

Income: Total income for the year is $28,336,212 and is comprised of:

  • $25,171 of interest income from six bank accounts held at JP Morgan Chase Bank as well as $464 interest earned from tax refunds.
  • $93 in W2 Wages for Bill from the Deb Talent Agency. I wonder what that was about.
  • $69,557 in state income tax refunds. Because state income taxes are deducted as an itemized deduction, any refunds must be included in income in the subsequent year. This is likely a declaration of their refund from 2014.
  • $28,020,811 net self-employment income earned from speaking engagements and sales of books. The expenses deducted looked in line with the type of business reporting. Bill Clinton paid wages as well as a benefit package to his employee(s). Their largest expense was commission payments to the Harry Walker Agency. Bill took a home office deduction. He is entitled to deduct a pro rata share of utilities, repairs and maintenance, property taxes, homeowner’s insurance, mortgage interest, etc. but instead he deducted only $945 in depreciation.
  • $3,000 capital loss carryforward from prior years. There were no capital gains transactions on the current year tax return; they did not play the stock market. However, their total capital loss carryforward was $702,540. At three grand a year that will take a long time to be absorbed. However, if they have future capital gains, the loss will be applied against those gains before any tax is levied.
  • $223,580 from pensions and other retirement vehicles; the main pension pay out was from GSA (Bill’s retirement pay from his presidency).

 

Deductions: The Clintons filed Schedule A with their income tax return claiming itemized deductions of $5,159,242, rather than taking the standard deduction. The deductions claimed were:

  • $2,819,599 paid in state income taxes
  • $104,303 paid in real estate taxes
  • $41,883 in mortgage interest on their principal residence
  • $3,022,700 in charitable contributions. $3,000,000 was donated to the Clinton Foundation, $2,500 was donated to St. Stephen’s Armenian Apostolic Church, $200 was donated to Hot Springs High School Class of ’64, and $20,000 to First United Methodist Church
  • No deductions were claimed for investment advice or tax preparation fees likely because the deductions would not exceed the 2% of AGI (adjusted gross income) ceiling. Also no deduction was claimed for vehicle registration fees. No deduction was claimed for medical expenses. Even if they incurred medical expenses, the ceiling is 7.5% of AGI for those aged 65 or older.

Please note: I am neither endorsing or denouncing any Presidential candidate. I am simply attempting to explain the implications of their promises about tax reform.

 

 

Donald Trump has sketched out a tax plan that he promises “will reduce taxes for everyone.” Individual rates will be trimmed to three brackets: 12%, 25%, and 33% replacing the seven current rates of 10%, 15%, 25%, 28%, 33%, and 39.6%. According to his plan, those in the lowest bracket will pay an additional 2 points or 20% while those in the highest bracket will enjoy a reduction of 6.6 points or a decrease of 18%. This is hardly a reduction “for everyone.” It appears the top one percent will benefit rather than those in the middle or lower income levels.

At the top of the list was the eye-catching promise to reduce corporate rates to 15%. Interesting. Only three points higher than the projected lowest rate for low income individuals. And the same basic rate (although thanks to Obama it could be at 20% depending on various factors) for capital gains. Capital gains tax is levied on stock and other asset profits, interest, and dividends, which is the main form of income for the wealthy. This is why Romney as well as many others in the top one percent enjoy an effective tax rate of only 13.6%.

Hardly seems fair does it?

Well, Trump believes a 15% corporate tax rate will stimulate the economy. Trickle down and all that. But historically, tax breaks for big business have only increased the gap between the top one percent and the lower income classes. Think about it; are you feeling the trickle down?

‘Stimulating investment’ by lowering taxes for the wealthy is the mantra of the wealthy. Does anyone really buy this? I’m no economist, just a lowly tax professional, but c’mon, common sense dictates that tax considerations are not the chief motivating factor in making investment decisions. The primary consideration is “Am I going to make money off this venture?” Tax implications come into play only when projecting net gain or loss. Let’s face it; the rich will always be investors. The tax rate is not the end-all for making that choice. What else are they going to do with their money? Sit on it? Only a few eccentrics will choose to hide their money in a mattress or stick it in a low paying bank account. The rest will play the stock market, develop real estate, buy bonds, become part of the Shark Tank, going for the bigger returns. If these investors make a hundred thousand dollar profit, they will pay taxes on it. Why should they enjoy paying a mere 15% on that profit while every other American making the same amount or less working for the man pays their taxes at a much higher rate?

Ultimately, it is Congress, not the President that determines changes to or creation of tax law.

Perhaps Congress should consider eliminating the capital gains tax rate and charge those profits according to the tax brackets for ordinary income. Perhaps they should leave corporate taxes at a max rate of 35% and get rid of corporate loopholes that allow larger corporations to pay zero. And maybe Congress should lower the tax rates for the middle class who seem to bear the brunt of the tax obligation. Maybe it should be our turn. Shall we call it the “trickle up” effect?

 

 

 

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