Blog: Ask A CPA

The Doolittle Raiders Are All Now History

Shortly after the Japanese bombed our naval base at Pearl Harbor on December 7, 1941, Lt. Col. Jimmy Doolittle led a raid to bomb Tokyo on April 18, 1942. He recruited 80 volunteers to fly 16 land-based B-25s. They took off from an aircraft carrier with roughly 500 feet of runway. The B-25s normally needed thousands of feet of runway to take off, so they were stripped and were able to lift. When they took off, they were roughly 400 miles from Tokyo and barely had enough fuel to make it. Once the mission was successfully completed they continued on and their planes crashed in the mountains in China. They parachuted out in the dark of night. Lt. Dick Cole jumped 9000 feet from his doomed bomber and ultimately landed in a tree. He had never parachuted before.

Lt. Cole died just two weeks ago at age 103 and an epic chapter in American History was closed. After the raid, the crew was soon reunited. With the Japanese in close pursuit, a harrowing escape began. Three men were killed in action, eight pilots were captured, three were executed, one died in captivity, and the remaining men made it back with the help of the Chinese. At each raider reunion, there were 80 silver goblets, one for each airman. They would drink toasts to those who had died in the previous year, then overturn the lost men’s goblets. The final goblet belonged to Lt. Dick Cole, the last of that brave group known as Lt. Col. Jimmy Doolittle’s Raiders.

The raid shocked the Japanese, prompting them to contract their forces and aim for Midway.  In winning that battle, America began to win the war.

When you take time to remember the sacrifices that our brave men and women in the armed forces made for our freedom you should also remember this quote by Benjamin Franklin: “They who give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.” You should then listen to the candidates running for president and decide if giving up your liberty for your safety, and then losing both, was worth it. Americans will decide in 2020 if they want to give up their liberty for their safety.

That is all today. Let me know if you have a question—you can call my office or simply leave a comment on this post.

A Quick Overview of Tax Reform Changes

The changes enacted by the Tax Cuts and Jobs Act affect every taxpayer filing a 2018 tax return this year. To help my fellow taxpayers understand these changes, I have prepared a quick overview below.

Tax Rates Lowered

Starting in 2018, tax rates are lower for almost every income bracket. The seven rates range from 10 percent to 37 percent.

Standard Deduction Nearly Doubled

For 2018, the basic standard deduction is $12,000 for singles, $18,000 for head of household, and $24,000 for married couples filing a joint return. Higher amounts apply to people who are blind or at least age 65. Along with other changes, this means that more than half of those who itemized their deductions in tax year 2017 may instead take the higher standard deduction on their 2018 tax return.

Itemized Deductions Limited or Discontinued

Home mortgage interest on a new mortgage above $750,000 is not deductible, as well as interest on home equity loans not used for home improvements. State and local taxes are only deductible up to $10,000, but this limit does not apply to your rental property or business taxes. All those business expenses and other miscellaneous itemized deductions that you deducted on Form 2106 and Schedule A in prior years are no longer deductible in 2018.

Child Tax Credit Doubles and Phase-out Expanded

The child tax credit is now $2,000 for each qualifying child under the age of 17. And the phase-out doesn’t begin until your AGI exceeds $400,000 for married couples and $200,000 for other taxpayers. Remember: Last year the credit was $1,000 and the phase-out began at $110,000 for married couples. This is a big deal for young families.

New Credit for Other Dependents

Taxpayers can claim a $500 credit for each dependent who doesn’t qualify for the Child Tax Credit. This includes older children, as well as qualifying relatives, such as a parent.

That is all today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out if you have a question—you can call my office at (713) 785-8939, send me an email, or leave a comment on this post. I’d love to hear from you.

The Internal Revenue Service After the Shutdown

The tax system administered by the IRS will feel the effects of the federal shutdown for a long time. The five-week closure in December and January couldn’t have come at a worse time for the Service, which was gearing up for the 2019 filing season, its first under the new tax law. Some experts are saying it could take the Service up to eighteen months to recover.

During the shutdown, the IRS lost about 125 IT employees, which averages about 25 for each shutdown week. Given the agency’s antiquated computer systems, losing these people is a big deal. Training service workers, especially customer service workers, on the new tax law was also delayed. This will also likely affect the already dismal level of service provided on the IRS’s toll-free helplines. Are you wanting to call the IRS with a question? Be prepared to give personal information about yourself to help customer service representatives confirm your identity. You will have to supply your Social Security number and date of birth, your filing status, and probably data from your prior year return.

There is also a huge mail backlog—over 5 million pieces of unprocessed mail. So if you mailed correspondence to the Service during the shutdown, good luck.

The audit rate for 2019 will plunge, since enforcement was put on hold. The IRS will also have a difficult task of attracting and retaining talented workers, especially millennials. Fear of future shutdowns may lead existing employees to retire early or flee to the private sector, adding to the IRS’s ongoing brain drain problem. Over 33% of IRS employees are over age 55, and only 125 workers nationwide are under age 26. Does this sound good to you? So I must ask, does the federal government seem like the best alternative to run our healthcare system? You will get to decide in 2020.

That is all today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out if you have a question—you can call my office at (713) 785-8939, email me at robert@robertstevensoncpa.com, or simply leave a comment on this post. I’d love to hear from you.

Welcome to Tax Season! Details on the New 199A Deduction

Tax season has begun. This week, I examine a new section to the Internal Revenue Code that intends to give some degree of parity to certain types of small businesses—you can find the details below.

The New Section 199A Deduction

Congress added a new section to the Internal Revenue Code. Section 199A is intended to give some degree of parity to small businesses that operate as partnerships, S corporations, sole proprietorships, trusts, publicly traded partnerships, and REITS. Since C corporations are now taxed at 21%, Congress decided to give small flow-through businesses taxed at the higher individual level a break. The deduction is limited to the lower of 20% of Qualified Business Income or 20% of the individual’s taxable income.

If you are a Service Trade or Business, i.e. health, law, accounting, actuarial services, performing arts, consulting, athletics, financial services, brokerage services, or any other trade or business that relies on the reputation or skill of one or more of its employees, then your deduction is only allowed if your taxable income is below $315,000 if filing MFJ and $157,500 for all others.

For businesses other than service—businesses whose owners have taxable income above the phase out limit of $415,000 for MFJ and $207,500 for all others—there are deduction limitations based on W-2 wages and depreciable assets. It is a little complicated, but it is a great deduction.

Tax Season Has Begun

The IRS has begun accepting 2018 tax returns and is issuing refunds. Now is the time to begin gathering your tax data and making an appointment with your tax preparer. If you need a tax preparer and would like to use our firm, then do not hesitate to give me a call and we will set an appointment for you.

That is all today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out if you have a question—you can call my office at (713) 785-8939 or leave a comment on this post. I’d love to hear from you.

Happy New Year – Remember to File Your Personal Income Tax Return

I hope everyone had a restful and spiritual holiday season. As you know, it is my job to remind you that the New Year brings about your renewed responsibility to file your personal income tax return. It will be due on April 15, 2019. Also due on April 15 are your Trust returns on Form 1041 and your C Corporation returns on Form 1120. On March 15, 2019, your S Corporations on Form 1120S and your Partnerships on Form 1065 are due. These deadlines can all be extended.

You may also want to know that your Property Renditions are due to the HCAD by April 1, 2019 and your Texas Franchise Tax Reports are due to the State Comptroller by May 15, 2019. I probably don’t need to tell you that your payroll reports, which include your W-3, W-2s, Form 941, Form 940, and your TWC Report are due at the end of January.

I Want To Help You Understand the New Tax Law

I would like for you to consider having me come to your business to give a short (hour or less) seminar on the new tax law to your employees. I would talk about how the Tax Cuts and Jobs Act affects your business in particular and how it affects your employees. There are many changes that will seriously impact many taxpayers, and this would be a great opportunity to educate them. Afterward, we could have a Q&A session. We can discuss the content that would benefit your employees. There would be no obligation and it would be free.

That is all today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out if you have a question—you can call my office at (713) 785-8939 or simply leave a comment on this post. I’d love to hear from you.

What Should Texas Do About Sales Tax – The Wayfair Decision

In 1992, the US Supreme Court ruled in North Dakota v Quill that a physical presence test must be met for a state to charge sales and use tax. Online sales by retailers with no nexus in a state were not required to charge sales tax.

That may change very soon.

On June 21, 2018 the US Supreme Court ruled in South Dakota v Wayfair that states can impose a sales tax on out of state retailers, even those that do not have a physical presence in the state. It leaves the decision to the various state legislatures: Do they stay with the Quill decision and forego millions in sales tax revenue, or do they adopt the Wayfair decision and require the out of state seller to collect and remit the sales and use tax? In 1992 online sales were in the millions and now they are in the billions and states and cities want the revenue. There will probably be a threshold for small retailers that will exempt them from sales tax reporting similar to Quill if annual sales are (for example) less than $100,000 or they have less than 200 transactions. Also, can you imagine filing and paying 50 sales tax returns every quarter (or month)? What should Texas do?  Should we lower the state rate?

In Houston, we pay sales tax at an 8.25% rate. The state portion is 6.25%, the city portion is 1.00%, and the MTA (Metropolitan Transit Authority) portion is 1.00%.

I support charging sales tax on online purchases because it will help level the playing field.

I believe this will broaden the base and allow for a reduction in the rate.

I will keep you posted.

That is all today. I look forward to visiting with you next week. In the meantime, please don’t hesitate to reach out if you have a question. You can call my office at (713) 785-8939.

A Gift That Lasts a Lifetime – The Roth IRA

You should consider giving your child or grandchild a Roth IRA.  

In 2018, you can contribute up to $5,500 to a Roth IRA. The contribution cannot exceed the child’s earnings and if the child has no earnings, you should consider filing a Schedule C with their return and reporting and paying tax on an amount equal to their contribution up to the maximum. The $5,500 pay-in for your child or grandchild counts against your $15,000 gift tax exclusion ($30,000 if you are married).

Some of the advantages and disadvantages of the Roth IRA are…

  • The earnings grow tax deferred and, when taken out at age 59 ½, the entire distribution is tax free.
  • The original contributions are always tax free, even if you withdraw them before age 59 ½.
  • The contributions to a Roth IRA are not tax deductible.

When your child grows up she can continue the contributions…

  • When the child reaches age 50 she can contribute an additional $1,000 or $6,500.
  • When your child reaches age 70 ½, she will not be required to make minimum distributions.
  • If your child is single, the allowable contribution begins to phase out with adjusted gross income between $120,000 and $135,000… and if she’s married, the allowable contribution phases out between $189,000 and $199,000.
  • She can make contributions after age 70 ½.
  • She is not required to take distributions from her Roth IRA… ever.
  • To avoid the 10 percent penalty and any income tax on the earnings, there must not be any distributions during the 5 year period beginning with the first tax year a contribution was made, except if made on or after attaining age 59 ½, the individual’s death or disability, or to pay for first-time home buyer expenses.

I don’t need to tell you that the IRA could grow for 45 to 50 years and when she reaches age 59 ½ she could make withdrawals tax free. You should probably talk to your financial advisor to get the advice you need to reach your goals. Call me if you need a recommendation.

That is all today.  I look forward to visiting with you next week.  Please don’t hesitate to reach out if you have a question—you can reach me at (713) 785-8939.

Net Operating Loss Deductions Under the New Tax Law

This week, I continue my exploration of the reforms brought about by the Tax Cuts and Jobs Act. Today’s topic: Net Operating Loss Deductions.

Net Operating Loss Deduction – Old Law

NOL deductions are computed on Schedule A of Form 1045 and taken on Line 21 of the Form 1040. Under the previous law, if your business incurred an operating loss (expenses exceeded revenues) or you as an individual incurred a disaster loss in a Presidential Disaster Area (Hurricane Harvey), then you could compute and use an NOL deduction. NOLs could be carried back either 2, 3, or 5 years depending on the type of loss, and then carried forward. The taxpayer also had the option to waive the carryback period, but to qualify they were required to attach an election to their timely filed tax return—and that includes the additional time allowed if they filed an extension. The Tax Cuts and Jobs Act changed things.

Net Operating Loss Deduction – New Law

The new law repeals the various carryback periods, but provides a two-year carryback for certain losses incurred in farming businesses and insurance companies. The new law provides that NOLs may be carried forward indefinitely. The new law also limits the amount of the NOL that may be deducted in any one year to 80% of taxable income, determined without regard to the NOL deduction itself. The effective date of the new law is defined as tax years beginning after December 31, 2017. Therefore, any taxpayer with NOL carryovers from tax years prior to January 01, 2018 will not be subject to the 80% of taxable income limitation and taxpayers will have to distinguish between the two types of losses when computing the NOL deduction.

That is all today. I look forward to visiting with you next week. Let me know if you have a question—you can reach my office at (713) 785-8939 or just leave a comment on this post.

Tax Reform Update—Changes to the Child Tax Credit

Under pre-Tax Cuts and Jobs Act (TCJA) law, parents could claim a child tax credit (CTC) of $1,000 for each qualifying child under the age of 17. The CTC was phased out for taxpayers with an adjusted gross income (AGI) above certain thresholds—$110,000 for married filing joint taxpayers and $75,000 for single and head of household taxpayers. The CTC was reduced by $50 for each $1,000 or fraction thereof that their AGI exceeded their threshold amount.

All that is changing for 2018 and beyond. Below, I examine the changes in detail.

New Law – Qualifying Child

For tax years after December 31, 2017 and before January 1, 2026, the TCJA modifies the CTC by increasing the credit to $2,000 for each qualifying child under 17 and increasing the phase-out threshold to $400,000 for married filing joint taxpayers and $200,000 for all others. The phase-out computation stays the same. It is also important to know that the CTC has a refundable portion of $1,400. This means that if your total tax liability is less than the sum of your total child tax credits, then up to $1,400 per child can be refunded.

Example: H and W have three qualifying children under age 17 and their total tax liability is $1,500. Their total CTC is $6,000. Their refund is limited to $4,200 ($1,400 x 3).

New Law – Other Dependents

The CTC is also modified to provide a $500 non-refundable credit for qualifying dependents other than qualifying children. This would include dependent children 17 and over (such as college students), disabled adult children, or elderly parents under your care. The phase-out thresholds are the same as the CTC.

That is all today. I look forward to visiting with you next week. Let me know if you have a question—you can reach my office at (713) 785-8939. You can also leave a comment on this post.

Tax Reform Update—Here’s What to Expect

The IRS is working on implementing the changes created by the Tax Cuts and Jobs Act (TCJA).  Here are some of the major tax reform changes you can expect.

New Business Deduction Form

One of the most exciting TCJA changes is the new form the IRS is developing for taxpayers to calculate the qualified business income deduction (QBI). Self-employed taxpayers, partners, and S corporation shareholders will use this form to claim the QBI deduction on their tax return. If you are in this group then stay tuned for IRS guidance expected to come out during 2018 and be sure to work with your tax preparer to maximize your QBI deduction. I will keep you informed.

TCJA Changes for Individuals

One important change: You won’t claim a dependent exemption for your children or other dependents or a personal exemption for yourself or your spouse. You will still need to provide the information needed to take the credits for your children and non-child dependents if you qualify. Another change is the doubling of the standard deduction to $24,000 for taxpayers who are married and filing jointly. But your total allowable deduction for state and local taxes such as sales tax, state income tax, real estate tax, and personal property tax is limited to $10,000. The interest payments on your home equity loan might not be deductible. As we discussed in recent weeks, you can no longer deduct employee business expenses on Form 2106 and you can no longer deduct miscellaneous itemized deductions. Casualty and theft losses are no longer deductible unless they occur in a federally declared disaster area. And lastly, medical expenses are only deductible to the extent they exceed 7.5% of AGI. I hope this helps—I will continue to review TCJA tax law changes in the weeks and months to come.

That is all today. I look forward to visiting with you next week. Let me know if you have a question—you can reach my office at (713) 785-8939. You can also leave a comment on this post.