IRA RULES CHANGED- WATCH OUT! EFFECTIVE 01/01/20- JUST PASSED IN DC

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WHY DOES WASHINGTON DO EVERYTHING AT THE LAST MINUTE??

 

December 22, 2019

On January 1, 2020, the Secure Act will take effect which will include five significant changes in the rules and regulations for IRA’s.
Massachusetts Income Tax (and the MA IRA Withholding) Rate Drops to 5.00% on January 1, 2020
Previously approved by the House of Representatives, the Senate passed this legislation on Thursday December 19th. President Trump then signed it into law late Friday December 20th.
Thus the SECURE Act is set to become effective on January 1, 2020.
The SECURE Act includes five significant changes to IRA Rules and Regulations:
Age Limit Eliminated for Traditional IRA Contributions – Beginning for Tax Year 2020 and beyond, the new law eliminates the age limit for Traditional IRA contributions (formerly age 70½). Thus as with a Roth IRA, those with eligible earned income can continue to contribute to a Traditional IRA regardless of their age.
RMD Age Raised to 72 – The SECURE Act increases the age for commencing RMDs to age 72. IRA owners reaching age 70½ after December 31, 2019 will not have to take their first RMD until the year in which they attain age 72.
New Exception to the 10% Penalty for Birth or Adoption – The SECURE Act adds a new 10% penalty exception for birth or adoption. The distribution is still subject to tax. It is also limited to $5,000 over a lifetime. But the birth or adoption distribution amount can be re-contributed back at any future time

IRA Contributions with Fellowship and Stipend Payments – Additionally, the new law allows taxable non-tuition fellowship and stipend payments to be treated as eligible compensation to qualify for IRA contributions.

Most Importantly…The “Stretch IRA” Disappears for Many – Beginning for deaths after December 31, 2019, the “Stretch IRA” rules will be replaced with a “Ten Year” distribution rule for most IRA beneficiaries. The rule will require accounts to be emptied by the end of the tenth year following the year of death of the IRA owner. There will be no requirements for annual Beneficiary RMDs as currently exist. The only RMD required of a Beneficiary of an Inherited IRA will be the full Inherited IRA balance being withdrawn by the end of the 10th year after the IRA owner’s death. But for deaths in 2019 or in prior years, the old Beneficiary RMD “Stretch IRA” rules will remain in place.

There are five categories of “eligible designated beneficiaries” who will be exempt from this new 10-year post-death payout rule and who can still use the existing Stretch RMD rules over their life expectancy. These are:
surviving spouses
minor children
disabled individuals
the chronically ill, and
beneficiaries not more than ten years younger than the IRA owner

NEW- what travel expense allowed without LOG BOOK

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Travel Expenses Allowed Without Log Book
Cross References • Maki, T.C. Summary Opinion 2019-34 In general, travel expenses have strict substantiation requirements. A taxpayer must maintain records that include: • The amount of the expense, • The time and place of travel, • The business purpose of the expense, and • The business relationship between the taxpayer and persons provided meals. Courts generally require that the taxpayer produce a contemporaneous log book documenting the above information for each business trip taken. The taxpayer in this case regularly traveled to take care of and monitor timber on his land. The round trip from his residence to and from the land is about 300 miles for each visit. During the trips, the taxpayer would plant new trees and care for them so that they could be harvested for future timber sales. Two of his properties had trees with a harvest value of over $1 million. The taxpayer testified that in a previous year while he was very sick and not able to check on his land, the fir trees were illegally harvested. Commercial timber companies hire people to regularly check and patrol their timberland to curb or thwart illegal harvesting. The taxpayer was not able to afford the cost of hiring people to check and patrol his land. That is one of the reasons why he regularly visits his timber properties. The taxpayer maintained a log listing the days that he visited and stayed on the land. The log, along with other records, was maintained in the building he uses when visiting the land. During an IRS audit, the taxpayer used the log to make a summary of his visits during the tax year that was under audit. After he prepared the summary, the original contemporaneous logs and other records were stolen when the building in which they were maintained was vandalized. The summary reflected that the taxpayer was present at the properties a total of 161 days during the year at issue. The summary also reflects that the taxpayer made 47 round trips from his residence to the timber properties. Some visits were as short as one day, but most were three-day visits. For the year at issue, the taxpayer reported zero income on Schedule C for his timber activity. Expenses included $7,011 for travel, and $55,925 for away from home per diem. The IRS disallowed these two deductions because the taxpayer did not adequately substantiate the expenses with a contemporaneous log book. The Tax Court noted that the IRS did not question whether or not the taxpayer was engaged in a business activity or whether he was away from home when he visited the tim
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ber properties. The IRS only argued that the taxpayer did not substantiate his deductions by providing a log book. The court stated the taxpayer established a normal pattern of travel. He always traveled to the same locations. His testimony that he maintained a log is credible, and his summary presented as evidence to the court was extracted from that log book. The repetitive pattern of travel is easily verified because it was essentially the same each week. That fact along with the taxpayer’s credible testimony was sufficient to show the occasions on which he traveled to and visited the timber properties. The court also agreed that the travel expenses were ordinary and necessary because of the need to monitor the timber and to maintain and plant trees. The court agreed with the taxpayer that he made 47 trips and spent 161 days at his timber properties. The $7,011 for travel was allowed by the court because it reflected the permitted standard mileage rate for the total miles driven to and from the timber properties. The court reduced the per diem deduction to $7,406 to reflect the standard meal allowance for the number of days away from home. The per diem for lodging was not allowed because the taxpayer did not provide any evidence of the lodging expenses actually incurred in the timber activity during the year.
Receipts for expenses are not required for deducting the standard mileage rate or the standard meal allowance. Receipts for actual expenses are required to deduct lodging expenses. The per diem rate for lodging is only used to determine the amount of employer reimbursement that meets the accountable plan rules. Self-employed taxpayers who are not reimbursed for lodging cannot use the per diem rate method for deducting lodging expenses

Fall/Winter 2019 TAX UPDATE

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Hello Clients and Friends!

First, I would say Thank You all for your business and good relationships built. Please never hesitate to contact myself or Maureen if anything seems amiss.

End of year planning

Yes, there is still plenty of time for year-end planning meetings, analysis, or even via telephone and email. If you want to get a good grip on the tax outcome early, give us a call!

IRS ALERT!

The IRS is cracking down (audits) on certain Partnerships and S Corporations. Using their tight budget, the IRS is relying more on 3rd party collections and computer data integration. Shorter period times before penalties and bank levies automatically get slapped on. We have been getting warned on keeping good basis records. Many of you, I am sure, heard us asking for basis information this past year. Now the IRS has launched a program audit; it involves:

  1. Comparing your S Corp/Partnership basis calculations.
  2. Reviewing size of “officer compensation” along with size of distributions.
  3. Any distributions? Do they exceed your salary?
  4. Are you lacking receipts or substantiation for business expenses?
  5. Do you keep a mileage log? If you have automobile deductions, you should.

Agents tell me that these audits should produce some easily calculated (negative) results for     the taxpayer. Cash or items for personal use on the company tab. They both count as distributions, which are fine, so long as the rules are followed. Even if accurate and verifiable, its never worth having an audit just to prove you were right all along.

We are already changing the strategies to avoid these which have already begun. IRS targets 2017/2018 right now, which allows them to audit 3 years of tax returns if necessary.

REAL ESTATE REPORT

A recent move by the Federal Housing Finance Agency is causing Uncle Sam’s footprint in multifamily lending to shrink. They closed loopholes that have previously allowed Fannie Mae and Freddie Mac to exceed their previous caps.

According to Mortgage Bankers Association, lenders have had a 14% increase over 2018 on mortgages secured by malls, hotels, apartments etc. Commercial real estate property loans will continue to increase in 2020.

Also, large real estate losses reported, especially by professional are being eyed by the IRS. To fully deduct their rental losses, “real estate professionals” must satisfy the two time test. They must spend over 750 hours materially participating in real estate activities and over half of the working hours. Very few taxpayers will escape an audit using the “professional” title and deduct unlimited losses. Otherwise, you will get up to $25,000 loss on rental properties, so long as your Adjusted Gross Income doesn’t exceed $150,000. That’s the top end of the loss/phaseout of passive income. Laws still there since the 80’s and never really changed

Good news

The new business deduction (started for the 2018 tax returns), is called the 20% “qualified business income deduction” (aka “QBID) may apply if you have income from rental properties. But first, you must meet the QBI requirements. Taxpayers must devote no less than 250 hours to the rental activity, unless owned for four or more years. In that case, the 250-hour requirement must be satisfied within three of the most recent five years. Please be aware that time spent traveling to and from the property and arranging finances are not to be included in hours. Time spent providing tenant services, advertising, property management, collecting rent, and repair and maintenance are counted in the 250-hour requirement.

GIVING

Are you feeling generous this year? Make the most of your charity donations by contributing appreciated assets (stocks, etc.) In most cases, you can deduct the full value. Donating depreciated (business) assets would be a waste of the capital loss.  Be sure to meet timing expectations to lock in your donations for 2019. KEEP RECEIPTS!

CORPORATIONS/BUSINESS SCH C/LLCS

Most taxpayers that operate a business, regardless if Schedule C,E,F, or an S Corporation or Trust. Just a reminder that getting information in to us the earliest in January as possible will help ensure a good return time.

2019 TAX ORGANIZERS

The 2019 tax organizers should be installed soon. Generally, after proofing and IT maintenance our goal is to make those available to you by January 01, 2020. Watch your email from the portal system

NEW FOR 2019 RETURNS

Standard deduction up by $400 Married Filing Jointly; up $200 Single

IRC Section 179 immediate write-off- limit increased to $1,020,000 from $1M in 2018

Gift tax – annual exclusion remains at $15,000, will be same in 2020

IRA limits are up- $6,000; $7,000 (age 50 +)

401K are up too- $19,000; $25,000 (age 50+)

SIMPLE IRA- up $500 ($13,000; to $16,000 if 50 or older)

November 2018 Tax Update

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Overview of tax-saving moves for the rest of 2018.

Hi Everyone and Merry Christmas/Happy New Year!

YES there is still time for 2018 tax planning if you have not scheduled a meeting yet. The tax laws have changed in a very big way.

*Please note that we no longer use the Chelmsford office location. We’ll keep everything at our Leominster, MA location.

We would like to welcome two of our new accounting staff! Manager Terry Neff, EA, and Staff Accountant Madhu Saiprsad. A third new person begins next week. We will now be able to increase our bookkeeping and other work for clients that want it done right!

There are so many tax changes for 2018, it would be impossible to go into detail for each here.

Fortunately, the economy is buzzing ahead at record pace! This helps everyone and helps generate tax revenue for the country (without increasing our taxes).

Year-end tax planning for 2018 takes place against the backdrop of legislative changes that fundamentally alter the tax rules for individuals and businesses. For 2018, the Tax Cuts and Jobs Act (TCJA) does away with many familiar, long-standing tax rules and introduces a host of new ones. For individuals, there are new, lower income tax rates, a substantially increased standard deduction that for some makes up for severely limited itemized deductions and eliminated personal exemptions, an increased child tax credit (extra $1,000 per child under age 17), and a watered-down alternative minimum tax (AMT), among many other changes. For businesses, the corporate tax rate is cut to 21 %, the corporate AMT is gone, there are new limits on certain business interest deductions, and significantly liberalized expensing and depreciation rules. And the domestic production activities deduction (DAPD) is repealed, although there is a new deduction for non-corporate taxpayers with qualified business income from pass-throughs.

Despite this atmosphere of change, the time-honored approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers, along with the tactic of “bunching” expenses into this year or the next to get around deduction restrictions.

While many taxpayers will come out ahead by following the traditional approach (deferring income and accelerating deductions), others, including those with special circumstances, may want to consider accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect. For instance, a cash method professional who wants to accelerate income can do so by speeding up his business’s billing and collection process instead of deferring income by slowing that process down. Or, a cash-method taxpayer who sells property in 2018 on the installment basis and realizes a large long-term capital gain can accelerate income by electing out of the installment method.

Some of the key considerations to take into account when formulating a year-end tax saving plan include the following:

Capital gains. Long-term capital gains are taxed at a rate of 0%, 15% or 20%. And, the 3 .8% surtax on net investment income may apply

Low-taxed dividend income. Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. However, the 3.8% surtax on net investment income may apply, converting investment income taxable at regular rates into qualified dividend income can achieve tax savings and result in higher after-tax income.

Expensing deduction. For qualified property placed in service in tax years beginning in 2018, the maximum amount that may be expensed under the Code Sec. 179 dollar limitation is $1,000,000, and the beginning-of-phase-out amount is $2,500,000. (Code Sec. 179(b))

First-year depreciation deduction. Most new as well as used machinery and equipment bought and placed in service in 2018 qualifies for a 100% bonus first-year depreciation deduction.

New qualified business income deduction. For tax years beginning after 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income.

For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction is subject to multiple limits based on the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid with respect to the qualified trade or business, and/or the unadjusted basis of qualified property held by the trade or business. (Nothing is simple here!)

The highest tax rates do not start until you exceed about $600,000 (changes each year for inflation) in taxable income, rather than the old $200,000.

More businesses entitled to use the cash method of accounting. A five-fold increase in a key gross receipts test means many more businesses can choose to use the cash (rather than the accrual) method of accounting. Cash method taxpayers may find it easier to defer income and accelerate expenses!

Changes in individual’s tax status may call for acceleration of income. Changes in an individual’s tax status, due, say, to divorce, marriage, or loss of head of household status, must be considered, see Alternative minimum tax (AMT).

For 2018, the vast majority of individuals no longer have to factor in the AMT when conducting general tax planning or year-end tax planning. That’s because the exemption amounts (and the amounts used to determine the phase-out of the AMT exemption amounts) have been increased, and most of the AMT preferences and adjustments for individuals have effectively been eliminated. And the corporate AMT has been repealed.

Time value of money. Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.

Estimated tax. For how the estimated tax rules can be affected when taxable income is shifted from one tax year to another, Obstacles to deferring taxable income. The Code contains a number of rules that hinder the shifting of income and expenses. These include the passive activity loss rules, requirements that certain larger businesses use the accrual method, and limitations on the deduction of investment interest.

Charitable contributions. The timing of charitable contributions can have an important impact on year-end tax planning. Individual taxpayers who are at least 70-½ years old can contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers reduce their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity. As explained, some taxpayers who could take advantage of this tax break for this year, should consider deferring until the end of the year their required minimum distributions (RMDs) for 2018.

Call the office anytime at 978-514-8829 or FAX at 978-514-8820

All email should go to INFO@henrykulikcpa.com to allow it to be received in properly where it is tagged, scanned, and forwarded appropriately.

PLEASE do not send requested information or any source documents to an individual accountant’s mailbox. We can always ask another accountant to work on your case if need be, or collaborate with the first. The new updated and very qualified staff (plus the others that remain like me and more!) will ensure things will go as smoothly as possible for everyone.

The few appointment slots that remain open with me are mid- January and after April 15. (Plus there always a few cancellations- we still use the call list) Also, other qualified, experienced staff will be available for interviews too. It was truly a blessing to find these people who want to work hard for the benefit of the client. Of course. Clients may mail in everything if you desire, or send in via the online portal system. Either one will result in a telephone call to review and ask questions.

Thank You for letting us serve you, our valued clients! May you enjoy this joyous Holiday season safely and I look forward to hearing from everyone and seeing you soon!

Henry C Kulik, Jr.
Certified Public Accountant, LLC

IRS RELEASES LATEST AUDIT RATES 04.09.18

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Although IRS audit continue to get reduced for various reasons (short-staffed for one) computer generated audits are rammed up:

2017 Individual audit rates overall was .6% (1 of 167)

Earned Income Credit filers: over 1%

Schedule C returns: 1% – 2.1%, especially with gross receipts over $25,000.
Income over $200,000 and no Schedule C: .8% audit rate
with a Schedule C over $200K 1.6%

Millionaires 4.4%

C Corps– 1%

S Corps .3% (lowest)

Partnerships .4%

EVEN MORE TAX LAW CHANGES!

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Our U.S. Congress, in its infinite superior legislative style, passed over 60 2017/2018 tax law changes on February 09, 2018. These include:
1.Making PMI deductible again if AGI is below $100,000 for a couple, $50,000 if MFS,
2. allowing HELOCs to be deductible again (only if used to build, maintain, improve your main home),
3. Discharge on Qualified principal residence debt not taxable (Fed, but taxable in MA),
4. Bring back for 2017 the education deduction above the line if AGI below $160,000 MFJ
5. Business Indian Credits returned through 2017
6. Credit for certain fuel cell vehicles
7. Restore residential energy credit through 2021
8. Renewable energy production credit
9. New energy efficient home credit through 2017

..and many other parts that are too deep to get into here. (See Bipartisan Budget Act of 2018″ HR 1892, P.L. 115-123)

All others remain as stated in the new 2018 tax law changes. Rumors of everything being grandfathered in are likely false, except the $1M debt limit if loan was taken out prior to 11/17/17)

We are still waiting for regulations and guidance from the IRS.

NOTE: My appointment calendar is already booked solid through February, 2019. Please do not wait until later if you expect to have an appointment with me. There are still some January spots available and March 01 and forward. Calls have been coming in since October of 2017 for 2019 appointments. Although I would love to se everyone, the President has ignored my pleas for a 9 day workweek!

Thank you for your business!

SPECIAL DECEMBER 27, 2017 TAX ACT CHANGE SUMMARY

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SPECIAL DECEMBER 27, 2017 TAX ACT CHANGE SUMMARY

Dear Client:

I am writing to inform you about changes to the individual and corporate income tax rates that take effect beginning in 2018 under the major piece of tax legislation called the Tax Cuts and Jobs Act (the Act).

I know many of you are excited and interested about all the details of every tax law change; so here are quite a few details. I have separated parts for easier reading! This newsletter is more detailed than the previous one.

This informational research is from Thomson-Reuters tax division, our research library and software provider.

Rate changes for individuals. New rates. Beginning with the 2018 tax year and continuing through 2025, there will still be seven tax brackets for individuals, but their percentage rates will change to: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

For MFJ example:

  1. The first $19,050 taxed at a flat 10%
  2. The next $58,350 taxed at 12% (Now you are at $77,400 taxable income)
  3. The next $87,600 taxed at 22% (Equals to $165,000)
  4. The next $150,000 taxed at 24% (Now you are at $315,000 taxable income)
  5. The next $85,000 taxed at 32% (Equals to $400,000)
  6. The next $200,000 taxed at 35% (Equals to $600,000)
  7. Whatever exceeds $600,000 taxed at 37%

Bottom line. While these changes will lower rates at many income levels, determining the overall impact on any particular individual or family will depend on a variety of other changes made by the Tax Cuts and Jobs Act, including increases in the standard deduction, loss of personal and dependency exemptions, a dollar limit on itemized deductions for state and local taxes, and changes to the child tax credit and the taxation of a child’s unearned income, known as the Kiddie Tax.

Comment: Although the corporate rate reduction is permanent, the new individual rates expire after 2025. The type of format used to pass this bill does not allow them to be greater than that period. It was not limited due to anyone wanting to “screw” anyone! There was no choice.

 

Capital gain rates.

The Act, generally, keeps the existing rates and breakpoints on net capital gains and qualified dividends. For 2018, the 15% breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, and $425,800 for any other individual (other than an estate or trust).

Important: These new individual income tax rates will not affect your tax on the return you will soon file for 2017, however they will almost immediately affect the amount of your wage withholding and the amount, if any, of estimated tax that you may need to pay.

A related change is that the future annual indexing of the rate brackets (and many other tax amounts) for inflation, which helps to prevent “bracket creep” and the erosion of the value of a variety of deductions and credits due solely to inflation, will be done in a way that generally will recognize less inflation than the current method does.

Corporate income tax rate drop. C corporations Beginning with the 2018 tax year, the Act makes the corporate tax rate a flat 21%. It also eliminates the corporate alternative minimum tax.

Pass-thru changes – should provide a substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as “pass-through” income.

The deduction is 20% of your “qualified business income (QBI)” from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business.

The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.

The deduction is taken “below the line,” i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.

Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.

For taxpayers with taxable income above $157,500 ($315,000 for joint filers), an exclusion from QBI of income from “specified service” trades or businesses is phased in. These are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.

Here’s how the phase-in works: If your taxable income is at least $50,000 above the threshold, i.e., $207,500 ($157,500 + $50,000), all of the net income from the specified service trade or business is excluded from QBI. (Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000.) If your taxable income is between $157,500 and $207,500, you would exclude only that percentage of income derived from a fraction the numerator of which is the excess of taxable income over $157,500 and the denominator of which is $50,000. So, for example, if taxable income is $167,500 ($10,000 above $157,500), only 20% of the specified service income would be excluded from QBI ($10,000/$50,000). (For joint filers, the same operation would apply using the $315,000 threshold, and a $100,000 phase-out range.)

Additionally, for taxpayers with taxable income more than the above thresholds, a limitation on the amount of the deduction is phased in based either on wages paid or wages paid plus a capital element. Here’s how it works: If your taxable income is at least $50,000 above the threshold, i.e., $207,500 ($157,500 + $50,000), your deduction for QBI cannot exceed the greater of (1) 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate). So if your QBI were $100,000, leading to a deduction of $20,000 (20% of $100,000), but the greater of (1) or (2) above were only $16,000, your deduction would be limited to $16,000, i.e., it would be reduced by $4,000. And if your taxable income were between $157,500 and $207,500, you would only incur a percentage of the $4,000 reduction, with the percentage worked out via the fraction discussed in the preceding paragraph. (For joint filers, the same operations would apply using the $315,000 threshold, and a $100,000 phase-out range.)

Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.

Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the thresholds discussed above. If you wish to work through the mechanics of the deduction with me, with particular attention to the impact it can have on your specific situation, please give me a call.

Tax deduction cuts. For tax years 2018 through 2025, the Act limits deductions for taxes paid by individual taxpayers in the following ways:

. . . It limits the aggregate deduction for state and local real property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes (if elected) for any tax year to $10,000 ($5,000 for marrieds filing separately). Important exception: The limit doesn’t apply to: (i) foreign income, war profits, excess profits taxes; (ii) state and local, and foreign, real property taxes; and (iii) state and local personal property taxes if those taxes are paid or accrued in carrying on a trade or business or in an activity engaged in for the production of income.

. . . It completely eliminates the deduction for foreign real property taxes unless they are paid or accrued in carrying on a trade or business or in an activity engaged in for profit.

To prevent avoidance of the $10,000 deduction limit by prepayment in 2017 of future taxes, the Act treats any amount paid in 2017 for a state or local income tax imposed for a tax year beginning in 2018 as paid on the last day of the 2018 tax year. So an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the $10,000 aggregate limitation.

Under the pre-Act rules, you could deduct interest on up to a total of $1 million of mortgage debt used to acquire your principal residence and a second home, i.e., acquisition debt.

Under the Act, starting in 2018, the limit on qualifying acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). However, for acquisition debt incurred before Dec. 15, 2017, the higher pre-Act limit applies. The higher pre-Act limit also applies to debt arising from refinancing pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. This means you can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt in the future and not be subject to the reduced limitation.

And, importantly, starting in 2018, there is no longer a deduction for interest on home equity debt. This applies regardless of when the home equity debt was incurred. Accordingly, if you are considering incurring home equity debt in the future, you should take this factor into consideration. And if you currently have outstanding home equity debt, be prepared to lose the interest deduction for it, starting in 2018. (You will still be able to deduct it on your 2017 tax return, filed in 2018.)

Lastly, both of these changes last for eight years, through 2025. (But will likely be extended, as others have been) through 2025. In 2026, the pre-Act rules are scheduled to come back into effect. So beginning in 2026, interest on home equity loans will be deductible again, and the limit on qualifying acquisition debt will be raised back to $1 million ($500,000 for married separate filers).

Alimony

New rules. Under the Act rules, there is no deduction for alimony for the payer. Furthermore, alimony is not gross income to the recipient. So for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them.

New rules don’t apply to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.

Some taxpayers may want the Act rules to apply to their existing divorce or separation. CAUTION!-Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree, unless the modification expressly provides that the Act rules are to apply. There may be situations where applying the Act rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.
I hope this clarifies at least some of the clutter being talked about everywhere. Questions? We’ll see you on your tax appointment or later in the year for planning. You can email or call the office anytime as well!

Regards,

Henry

 

Checkpoint Source: New Law Special Study: Highlights of the Tax Cuts and Jobs Act

NOVEMBER, 2017 FALL/WINTER

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NOVEMBER, 2017 FALL/WINTER TAX NEWSLETTER

For clients of: HENRY C KULIK, JR CPA LLC

November, 2017

As the end of year 2017 approaches, it’s time to think of planning moves that will help lower your tax bill for this year, and possibly the next. In many cases this will involve the usual year end planning ideas we have asked everyone to consider in the past:

  • Deferring income to the 2018 tax year, where we expect taxes to be lower (at some point)
  • Accelerating deductions into this year to reduce 2017 taxable income.

The tax code and tax rates are now some at of the highest in history. They have increased, in some form, almost every year over the last 7 years. Many new “phase-outs” and high sur-tax rates were tied directly to the ACA (affordable care act). When that wasn’t enough, every year the words came forth… “it’s time for the “rich” to pay their fair share.” What was not mentioned that “rich” included couples earning about $140,000 and singles about $70,000! These weren’t the $ millionaires and $ billionaires that were the supposed target shown on television.

Cautionary tale

Our reports show that IRS audits are pointing to form 1065 Partnerships, and form W-2 wages vs/ 1099-MISC where agents are finding companies misclassifying employees as subcontractors. A finding can result in severe interest and penalties, plus the employer gets to pay the income tax that should have been withheld along with FICA and Medicare. Then the State wants their piece of the pie. 3+ years of this, nicely wrapped under the tree. Fewer agents, but higher audit tax findings along with collection revenues from past due taxes are helping the treasury.$$$$$

New tax plans

It appears that all of the tax plans being talked about would take effect 1/1/18. (The bill even shows 2018 start date) Depending on the specific rules passed, most everyone will pay less in tax. Corporate taxes, including pass-throughs such as S-Corporations, and Schedule Cs could see the largest breaks in an effort to help businesses create new jobs through growth. The confusing part is what will the great sausage machine in D.C. finally turn out in the wrapper? Below I have illustrated just a few of the differences in the 3 plans: a) the original Trump plan (found at www.whitehouse.gov), b) the House of representatives plan (www.house.org)  and  c) the Senate plan (www.senate/gov)

*Married Filed Jointly* examples

Tax range on TaxRate Capital Gains Exemptions Itemized
Trump plan: $0 to $50,000 0% 0% no changes 100%
$50,000-$100K 10% 0% no changes 100%
$100K-$300K 20% 15% income based 50% (est)
$300K-and up 25% 20% phase-outs 75% (est)

Notes:  NO AMT; Charity and mortgage interest remains; No Estate Tax
Business tax changes to promote bringing offshore cash and jobs back to USA

House plan $0 to $90,000 12% 0% None Limits;$24K std
$90K-$260K 25% 15% None Limits;$24K std
$2600K-$1M 35% 20% None Limits;$24K std
$1M and up 39.6% 28% None Limits;$24K std

Notes: NO AMT; $10K limit on Home taxes; no adoption credits, no itemized for medical; mortgage interest won’t affect most people; debt cannot exceed $500K.Child Credit $1,600 Capital gain exclusion on personal residence limited/reduced;5/8 years instead of 2/5 removes moving expenses, form 2106, student loan interest. Any/all employer benefits taxable on W2.

Senate plan $0 to $19,050 10% 0% None Limits;$24K std
$19,051-$77,400 12% 0% None Limits;$24K std
$77,401-$120K 22.5% 15% None Limits;$24K std
$120K – $290K 25% 15% None Limits;$24K std
$290K – $390K 32.5% 24% None Limits;$24K std
$390K – $1M 35% 24% None Limits;$24K std
$1M and up 38.5% 28% None Limits;$24K std

Notes: NO AMT; Child Credit $1,650;$500 non-child dependent. Same itemized deduction as the House plan; NO Misc itemized. NO moving expense, NO casualty losses (same as House); business $2M Sect 179,) New business pass-thru deduction of 17.4% of business income (Phase-out $150K AGI)

NO business losses allowed; carryover instead. NO Professional tax rates (1120

Of course, all of this is just proposals and what, if anything, actually gets passed could be very different.  Much like other recent years if they fail to pass something very soon it could delay the start of the 2018 filing season and refunds being issued while the IRS updates their software, forms and instructions. So stay tuned and I promised to keep you posted!

Economic Outlook

There are a few predictions about the economy that could impact your taxable income. The stock market has been booming and is on track to close out 2017 with record highs. This could mean higher interest and dividend income on your investments plus a greater potential for capital gains on any stock sales. Check those year-end investment statements so you aren’t surprised when April rolls around.

The predicted 2.2% total economic growth for 2017 is making 2018 look really good at this point, with expected growth of at least 2.6%. Even if our friends in Washington fail to pass any kind of tax reform the 2.2% growth from 2017 is expected to continue.

Tax planning – Individuals

The Obamacare surtax of 3.8% is still in effect for 2017 on higher-income earners. If you estimate your modified adjusted gross income to be $250,000 MFJ, $125,000 MFS or $200,000 single or HOH or more you might want to look at deferring some of your income at the end of the year to reduce the impact of the NII tax.

A similar strategy could be used by those same earners with respect to year end wages or bonuses which could/would be subject to the 0.9% additional Medicare tax.

Consider increasing your deductible expenses by prepaying them or paying them with a credit card before year end. If you think you’ll owe state income taxes when you file in 2018 consider paying them ahead before the end of the year. This strategy could be most beneficial if the deduction(s) go away for 2018 as some of the tax reform models are suggesting. Do watch out for AMT though. If you are subject to AMT this strategy won’t help you.

If you have a pending insurance or damage claim, try to get it settled in 2017 to maximize your casualty loss deduction.

Avoid penalties by being sure to take your Required Minimum Distribution (RMD) from your IRA or 401K. If you turn 70 ½ in 2017 you need to take your first RMD by April 1, 2018. However, you’ll still need to take your RMD for 2018 before the end of 2018 so unless you will be in a much lower tax bracket in 2018 it could be most beneficial not to defer the RMD.

Tax Planning- businesses

If your business has done well in 2017 and you need new equipment or to invest in infrastructure it would be a good idea to get that in place before the end of 2017 to maximize your business deductions and minimize taxable income.  The expensing limit for 2017 is $510,000 and applies to most purchases that are depreciable (computers, off the shelf software, A/C and heat units, etc.) in addition qualified leasehold improvement, restaurant or retail improvement property are also eligible. Better still this deduction is NOT pro-rated which means that you can wait till December to make your purchase and still take the full deduction.

You can also take advantage of the 50% bonus depreciation on purchased assets (also not pro-rated) and the bonus drops to 40% in 2018.

If Congress manages to get tax reform through without too many changes Corporations may want to consider deferring some year-end income until 2018 if they will likely in a lower tax bracket.

If you aren’t sure about what your best strategy is you can always contact the office and I would be happy to discuss your particular situation. Now is also the best time for a face-to-face review of everything before the end of the year is here!

Happy Thanksgiving

Merry Christmas

May everyone have a blessed warm Holiday season!

Henry C. Kulik, Jr., CPA LLC

TAX OVERHAUL MAY TAKE EFFECT 01/01/18 WOW!

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Tax Overhaul Is Planned for 2018, Leaving Just a Few Weeks to Prepare
Most provisions in the House and Senate GOP tax bills would take effect in 2018, meaning people could have little time to do crucial year-end tax planning

Most provisions in the Republican tax bills would take effect in 2018, assuming a bill passes.

By Laura Saunders

Nov. 10, 2017 7:00 a.m. Fewer tax breaks for homeowners. No deduction for state income taxes. A higher bar for charitable write-offs. No “personal” exemption. No alternative minimum tax.

Republican leaders in the House and Senate have proposed different bills to overhaul the tax code, but both sweep away or limit many tax breaks for individuals in a bid to boost economic growth and simplify the system.
Both bills also expand credits for children. They increase the “standard deduction” greatly, so that perhaps 30 million filers wouldn’t need to break out deductions separately. Many business owners would get a tax break and owe less than wage earners with similar income. The estate-tax exemption would double, to $10 million a person.
There are so many differences between the two bills that exact outcomes are hard to predict, assuming a bill passes. What is clear is that people could have little time to do crucial year-end tax planning. Most provisions would take effect in 2018.
Here are tax moves to consider, based on current proposals.
Home Buyers and Sellers
The Senate bill preserves current law allowing deductions on a total of $1 million of mortgage debt on up to two homes.
The House bill would allow home buyers taking out mortgages after Nov. 2 to deduct interest only on $500,000 of debt, and only on one home. It appears to prohibit mortgage-interest deductions for all second homes. Both bills end interest deductions for home-equity loans.
If the House version prevails, the Nov. 2 cutoff might be extended in a nod to the Senate. But there are no guarantees, so buyers should beware.
Both bills also restrict the popular exemption of $500,000 of profit on the sale of a first home ($250,000 for singles). The new rules would require sellers to live in a house for five of the prior eight years, rather than two out of five years, to get the benefit.
The House bill reduces the exemption for sellers whose income exceeds $500,000 ($250,000 for singles). Affected home sellers should complete sales before year-end.
Pass-Through Income

Both bills cut taxes on some income earned by so-called pass-through firms such as partnerships and S corporations, but the rates and categories of business owners who would benefit differ.
Stay tuned as the final provision becomes clear. Business owners who would benefit from a lower rate may want to defer income into 2018, says Chris Hesse, a certified public accountant with CliftonLarsonAllen.
State Taxes
The House bill repeals the deduction for state and local income and sales taxes and caps the deduction for property taxes at $10,000. The Senate bill repeals deductions for property taxes, in addition to repealing the others. Exceptions apply for property-sales taxes paid by owners of pass-through firms.
Individuals who won’t owe alternative minimum tax this year may want to prepay 2018 state and local taxes that could be disallowed next year. This move requires careful analysis, as high state and local tax deductions could trigger the AMT in 2017 and eliminate much of the benefit.
Charitable Donations
If the standard deduction greatly increases as proposed, only 10% of filers will need to list write-offs separately compared with 30% now. Taxpayers donating a small percentage of income may want to accelerate donations into 2017 to get a deduction.
These givers should also consider so-called donor-advised funds. Such accounts enable donors to “bunch” several years of smaller gifts into one large amount. A donor can designate charitable recipients later, and meanwhile the assets can be invested and grow tax-free.
Plug-In Cars
Get your Tesla, Chevy Bolt, or similar plug-in vehicles before year-end. The House bill repeals a credit of up to $7,500.

Medical-Expense Deductions
The House bill repeals the deduction for medical expenses, which is highly important for people paying large bills for home health aides and nursing-home care. The Senate bill retains it.
Tax professionals caution against prepaying 2018 medical expenses in 2017. The law allows the IRS to disallow such write-offs entirely, and courts have ruled against the taxpayer on this issue.
There is an exception for some people entering retirement homes. Under current law, part of the entrance fee to such facilities could be deductible for 2017 even if the person doesn’t enter until 2018, says Andy Mattson, a CPA with Moss Adams. This is a complex area, and taxpayers should seek professional help.
Employee Stock Options
Workers who have Incentive Stock Options (ISOs) may benefit if they wait to exercise them until 2018, says Scott Kaplowitch, a CPA with Edelstein & Co. ISOs can trigger the alternative minimum tax, which both bills would repeal.
Alimony
Sign divorce or separation agreements that include alimony before the end of 2017. In the House bill, alimony ceases to be deductible by the payer in 2018.
Carlyn McCaffrey, an attorney with McDermott, Will & Emery, says that for a top-bracket spouse required to provide $250,000 of tax-free income to a bottom-bracket spouse, the tax savings from signing an agreement in 2017 compared with 2018 would be about $43,000.
Write to Laura Saunders at laura.saunders@wsj.com