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Monday, October 15, 2018, is the extension deadline for most taxpayers who requested an extra six months to file their 2017 tax return.

For taxpayers who have not yet filed, here are a few tips to keep in mind about the extension deadline and taxes:

  • Try IRS Free File or e-file. Taxpayers can still e-file returns for free using IRS Free File. The program is available only on IRS.gov. Filing electronically is the easiest, safest and most accurate way to file taxes.
  • Use direct deposit. For taxpayers getting a refund, the fastest way to get it is to combine direct deposit and e-file.
  • Use IRS online payment options. Taxpayers who owe taxes should consider using IRS Direct Pay. It’s a simple, quick and free way to pay from a checking or savings account. There are other online payment options.
  • Don’t overlook tax benefits. Taxpayers should be sure to claim all entitled tax credits and deductions. These may include income and savings credits and education credits.
  • Keep a copy of the tax return. Taxpayers should keep copies of tax returns and all supporting documents for at least three years. This will help when adjusting withholding, making estimated tax payments and filing next year’s return.
  • File by October 15. File on time to avoid a potential late filing penalty.
  • More time for the military. Military members and those serving in a combat zone generally get more time to file. Military members typically have until at least 180 days after leaving a combat zone to both file returns and pay any tax due.

With a straight face, the IRS recently released the 2018 Form 1040. The form has shrunk from a two-sided 8 x 11.5 sheet to post card sized, just as Trump promised. As if size matters. Everyone electronically files these days so it’s not like you will save a few bucks in postage.

Those who shy away from anything pertaining to taxes likely jumped up and down with joy in anticipation of tax simplification. Thing is, it’s a big fat joke. And I’m here to tell you that taxes got more complicated not simpler.

What the IRS accomplished was the butchering of Form 1040 to fit several line items on a two-sided postcard. The previous line items not included on the new Form 1040 have been added to six, count ‘em, six pages of additional schedules to attach to the “postcard.” When you do the math, you realize that the two-page form is now expanded to eight pages. Simplification indeed.

I was attending the California Society of Enrolled Agents Super Seminar in Reno when the new form was announced on June 27. The collective roar of disappointment and disapproval was followed by many snarky remarks and eventually laughter and plenty of eye rolling.

Just because Congress doubled the standard deduction does not mean we are headed into a new era of tax simplification. In any case, I agree with this move. After all, those who can’t itemize are generally renters because they don’t have the mortgage interest write off. I always felt this was unfair.  Doubling the standard deduction levels the playing field and opens up an increased  tax savings for those who cannot itemize.  But the savings is not as grand as you might think. Sure, if you’re married filing joint you will enjoy an extra $12,000 deduction from income, $6,000 if single, before tax is calculated. However, the IRS gives with one hand and smacks you across the face with the other. How did they do that? They yanked personal exemptions – that’s roughly $4,100 per person. So married filing joint, you net a reduction in income of only $3,800 ($12,000-$8,200) not the twelve grand you may have thought you would enjoy. It gets worse if you have kids because you previously received the $4,100 exemption for each dependent declared on the tax return as well. Now that’s gone. To make up for pulling the rug out from under for those with children, the IRS introduced a new and improved child tax credit to make up for the lack of personal exemption. Give, take, give, take, slap, without missing a beat.

I picture some malevolent nerd with nothing better to do creating all these complex moves and formulas and “if’s, and’s, and but’s” in some dank basement office. Maybe he’s just trying to keep us tax professionals in business. Keep our heads spinning is more like it. Thank you very much.

And as if things aren’t complicated enough, California does not conform to the new federal regulations. So we all get to memorize another set of tax code in order to comply with state tax law. Part of it is a good thing. For example, the deductions for employee business expenses, investment expenses, tax preparation software costs and preparer fees have been abolished by the IRS. But they are still deductible for CA purposes. so be sure to track those and report them next April 15. These deductions will decrease the amount of state tax you will owe.

Taxpertise

As you may have heard the Tax Reform Act has passed both the House and the Senate. It will be a little while before we can nail down the exact changes as there is quite a large discrepancy between the two bills. But change will come. All the fine points are expected to be discussed, debated, hammered out and forced into law before the end of the year. This, as usual, allows for very little tax planning. Nor does it allow for much time for consideration and discussion by our legislators.

Here is our advice for this month, December 2017.

  • Pay your property taxes for 2018 now if you are able. The deduction will either be eliminated or reduced to $10,000. Even if it’s lowered to $10,000 your tax benefit will be greater in 2017 because your tax rate is higher
  • Make your Q4 2017 estimated tax payment for California before the end of the year instead of on its due date of January 15, 2018. That deduction is going away permanently, so it would behoove you to pay it now while you can still enjoy the write off.
  • If you’re planning to buy a new car, do so in December rather than waiting. The new vehicle registration fee will not be deductible in 2018.
  • Prepay your tax preparation fee by December 31. That deduction is set to go away as well.

Listed below is a summary of the major changes that will likely affect you:

  • The top rate on the income earned by owners of “flow through” businesses — S corporations and partnerships — is reduced from 39.6% to a shade below 30%.
  • The standard deduction is doubled from $6,350 for a single/ $12,700 if married to $12,000/$24,000.
  • Deductions for personal exemptions are repealed, but the child tax credit is increased from $1,000 to $2,000.
  • Many popular itemized deductions — state and local income taxes, casualty losses, and unreimbursed employee expenses, among others — are eliminated.
  • The estate tax exemption is doubled, to $11 million for a single taxpayer and $22 million for married taxpayers.
  • The alternative minimum tax remains intact, although with a higher exemption amount.
  • The corporate rate is reduced from 35% to 20%.
  • Businesses will be able to immediately expense many asset purchases; after five years of 100% expensing, the rate will phase out at 80%/60%/40%/20% rates over the ensuing four years.
  • If you own rental property, your maximum tax rate on profits from rentals will be 25%. This is great news for wealthy landlords.
  • All of these changes will expire in 2025. Tax law will revert back to what we now know.

My feelings about all this are reflected by Tony Nitti, a respected journalist for Forbes Magazine: “As an American taxpayer, I’m saddened by the way the process played out. A tax bill needs to be carefully considered, available to the public for review and contemplation well in advance of a vote, and—in a perfect world—bipartisan. That way, we can reap the benefit of the most valuable product of tax reform: permanence. Certainty of where the tax law will be in years 3 and 5 and 7 and 10, so that we can plan accordingly. With a Republican-led bill, however, the tax law is only as certain as Republican control; should things flip in 2020, the Code will be revamped again, and it will be taxpayers left struggling to respond to the changes.”

As you will soon learn, this whole business about being able to “file taxes on a postcard,” is incorrect.  Schedule A will be trimmed down possibly eliminating its use for many taxpayers but that’s pretty much it. You must still use all other applicable schedules and line items as well as complete the information regarding health care coverage.

If you have any questions or concerns, please contact either Bonnie or Amanda at  bonnie@taxpertise.com or amanda@taxpertise.com.

Happy Holidays to you and yours.

I received this press release from Clark Gascoigne of The Fact Coalition, an organization that acts as a watchdog and taxpayer advocate. His articles and statements have appeared in Fortune Magazine, The Huffington Post, and various other prestigious publications. If this upsets you, please contact your Congressperson. If we all make our voices heard, we can accomplish change.

 

FOR IMMEDIATE RELEASE
NOVEMBER 9, 2017

House Advances Tax Bill that Increases Offshoring of Jobs & Profits

WASHINGTON, D.C. — The U.S. House Ways and Means Committee’s voted 24-16 to advance proposed tax legislation (H.R.1) Thursday afternoon, after making some last-minute amendments.  The bill, which now moves to the House floor next week, maintains measures that grant multinational corporations a discounted tax rate on the profits they currently hold offshore, while exempting many profits booked offshore from future taxation, according to the Financial Accountability and Corporate Transparency (FACT) Coalition.

Clark Gascoigne, the deputy director of the FACT Coalition, issued the following statement:

“Today’s changes to the House tax bill did little to address the incentives for companies to offshore profits and jobs.  The differences in tax rates still favor overseas profits to those booked at home. And, it still entirely exempts oil and gas companies, mining companies, and financial services firms from all taxes on their profits booked offshore.

“We are still reviewing the changes to the excise tax on profit-shifting but, after gutting the provision earlier this week, the most recent changes appear only to restore a portion of the anti-gaming measure.

“Despite minor changes to the rates on repatriated profits, the tax break is still worth hundreds of billions of dollars on profits already earned.  There is simply no economic case for discounted tax rates on economic activity that’s already happened.

“This legislation remains out of step with the American people, who overwhelmingly oppose these types of tax giveaways to tax dodgers.”

 

The Department of the Treasury today provided a brief outline of Trump’s proposed tax plan. It’s pretty much the same thing he talked about back in February. And mind you, it’s just a framework for Congress to work on and does not provide details of how this plan might work in conjunction with budget reconciliation. It’s fine to cut taxes but from where will the monies be found to provide infrastructure  and other government programs? See below:

Repeals the Death Tax and Alternative Minimum Tax (AMT)
The framework repeals the unfair Death Tax and substantially simplifies the tax code by repealing the existing individual AMT, which requires taxpayers to do their taxes twice.
Creates a New Lower Tax Rate and Structure for Small Businesses
The framework limits the maximum tax rate for small and family-owned businesses to 25% – significantly lower than the top rate that these businesses pay today.
To Create Jobs and Promote Competitiveness, Lowers the Corporate Tax Rate
So that America can compete on level playing field, the framework reduces the corporate tax rate to 20% – below the 22.5% average of the industrialized world.
To Boost the Economy, Allows “Expensing” of Capital Investments
The framework allows, for at least five years, businesses to immediately write off (or “expense”) the cost of new investments, giving a much-needed lift to the economy.
Moves to an American Model for Competitiveness
The framework ends the perverse incentive to offshore jobs and keep foreign profits overseas. It levels the playing field for American companies and workers.
Brings Profits Back Home
The framework brings home profits by imposing a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keeping the money offshore.

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.

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©2017 Taxpertise | Bonnie Lee, E.A. | Ph: 707.935.1755 Fax: 707.938.1891 | 453 2nd Street West, Sonoma, CA 95476