Category: Analysis

Business Expenses and the New Tax Law

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It is important to remember the age-old tax rule: “Expenditures are not deductible unless specifically allowed by law, and all income is taxable unless specifically excluded by law.”

With that in mind, let’s discuss Travel, Meals, and Entertainment under the new law. The new law makes it very simple. If you are a Form W-2 employee and you previously deducted your business expenses on Form 2106 Employee Business Expenses, then your Travel, Meals, and Entertainment are no longer deductible. That’s right! No longer deductible.

But there is a solution, and it’s called an Accountable Plan. It is not new, but it now has greater importance. With an accountable plan, you itemize your business expenses on an expense report, include your receipts, and your employer reimburses the exact amount. The employer gets the deduction and you have no income. Many employers give their employees a “flat allowance.” For the employee, this flat allowance will be income on their Form W-2 and the related expenses will not be deductible.

I recommend you be frank with your boss about the new law’s favoritism toward businesses. You may want to ask for reimbursement under an accountable plan and for certain costs to be covered for reimbursement. Good Luck.

For those taxpayers that are self-employed and report their income and expenses on a Schedule C, corporate return, or partnership return, then we will discuss what Travel, Meals, and Entertainment you can deduct in our tax letter next week.

Hurricane Harvey Casualty Loss and NOLs

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As Tax Day draws nearer, I continue to hear questions from taxpayers whose homes were affected by Hurricane Harvey. Today, I explore one instance in which a casualty loss from Harvey may be treated as an NOL, or net operating loss, and used to recover prior tax payments.

Can Your Casualty Loss from Hurricane Harvey Create an NOL for Carryback?

Yes. There may be an opportunity for an additional refund.

Individuals can claim an NOL for casualty losses that exceed the amount that can be utilized in the year the loss was sustained and reported. For those who suffered severe damage, the casualty loss may exceed their income and, therefore, they would not be able to fully utilize their casualty loss deduction for the year in which the loss occurred. The IRS allows such individuals to treat the loss as an NOL and carry it back to prior years. If income was insufficient in the prior years, a carryforward is available.

If done within one year of the NOL year, then you would use Form 1045; this will allow the taxpayer to receive a prompt refund. If the claim is filed more than one year after the close of the NOL year, then it must be filed on Form 1040X within the relevant statute of limitations for the loss year. Your normal NOL gets a two year carryback, but a special rule for casualty losses extends the carryback period to three years.

Congress enacted a special five-year carryback for those who suffered a loss from Hurricane Katrina. However, a similar special five-year carryback was not enacted for those who suffered losses from Hurricane Sandy. Tax professionals will be keeping an eye out for any new legislation that might extend the carryback period for victims of Hurricanes Harvey and Irma. Hopefully very few taxpayers will need five years to absorb their loss.

That is all for today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out with questions. Feel free to email robert@robertstevensoncpa.com or call my office at (713) 785-8939. I’m also available by text at (713) 906-8331.

Can You Deduct Interest on a Home Equity Loan Used to Remodel Your Home?

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In short, yes.

Debt secured by a first or second home and used to improve the place has always been considered acquisition indebtedness, so the new law’s crackdown on home equity loans doesn’t apply. After 2017, you can no longer deduct interest on home equity debt used for other purposes, such as to buy a car, pay off credit card debt, or pay college tuition. Remember when we changed the Texas Constitution to allow borrowing on the equity in your farm, ranch, or home for purposes other than home improvements? It was the early 1990s. Well, you can still borrow on your equity for other purposes, you just can’t deduct the interest.

There is also a new limit on eligible acquisition mortgage debt. The new law limits the deductibility of interest on acquisition indebtedness to $750,000 for tax years after December 31, 2017. The new law allows homeowners with existing mortgages to continue to deduct interest on a total of $1 million of debt for a first and second home, but for new buyers, the $1 million limit fell to $750,000 for a first and second home.

When it comes to refinancing your mortgage, homeowners can refinance mortgage debt up to $1 million that existed on December 14, 2017, and still deduct the interest. But the new loan cannot exceed the amount of the mortgage being refinanced, unless used to improve your home.

Example: If Joe has a $1 million mortgage he has paid down to $800,000, then he can refinance up to $800,000 of debt and continue to deduct interest on it. If he refinances for $900,000 and uses the $100,000 of cash to upgrade the home, then he could deduct the interest on the $900,000. But if he uses the $100,000 for other purposes, such as paying off credit card debt, then he couldn’t deduct interest on any of the $900,000 refinancing. I hope this helps.

That is all for today. I look forward to visiting with you next week.  In the meantime, don’t hesitate to reach out with questions.

Effects of the Tax Cuts and Jobs Act on the Wealthy

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Let’s discuss the impact the new tax law will have on two high levels of income. The first example is an attorney making $500,000 who is married with no children. In 2017, the household will have itemized deductions made up of state and local taxes of $37,285, home mortgage interest of $39,000, and business expenses exceeding 2% of AGI of $10,000. Their itemized deductions will be $80,699 after the Pease deduction (this is a stealth tax from the ACA). Their personal exemptions are totally phased out. Their taxable income will be $419,301 and their regular tax will be $113,638, but their AMT will be $122,671. The effect of the additional Medicare tax from the ACA will not be considered because it is the same in 2017 and 2018. In 2017, their tax liability will be $122,671.  

In 2018, if our same family makes $500,000, then they will have state and local taxes limited to $10,000, they will get all their home mortgage interest of $39,000, and their business expenses from Form 2106 are no longer deductible. Personal and dependent exemptions are repealed.  Their taxable income will be $451,000 and their regular tax liability will be $109,229. AMT is less than the regular tax because the AMT exemption is greater and doesn’t begin to phase out until $1M for couples. Their 2018 tax liability is $109,229. This is a tax savings of $13,442 or put another way, a savings of 11% from 2017 to 2018.

In our second example, we have a married couple with no children. They file jointly and in 2017 they make $1,500,000. They live in beautiful, sunny California and they own their home. Because beautiful California has a 13.3% state income tax and they own their home, they will have $300,000 in state and local tax; they also have $39,000 in home mortgage interest, and their Form 2106 Employee Business Expenses do not exceed 2% of AGI. After the Pease deduction, their itemized deductions are $303,414, their exemptions are phased out and their taxable income is $1,196,586.  Their regular tax liability is $419,079. AMT is not even in the picture.

In 2018, the same family making $1,500,000 will have taxable income of $1,451,000.  Remember SALT deductions are limited to $10,000 plus home mortgage interest of $39,000, and personal and dependency exemptions were repealed. Their tax in 2018 will be $476,249. This is a tax increase of $57,170.  

Please remember that there are those who oppose any type of tax cut for the American people. For most Americans the new law is a tax cut, especially if you live in a low-tax state like Texas. But if you live in a high-tax state like California or you own expensive real estate, then you will very likely have a tax increase. In my experience, most high income taxpayers own a successful small business and they use any tax savings to hire someone young and tech savvy to make their business more efficient. Remember, the American people can allocate their capital and spend their money more equitably and efficiently in the marketplace than the federal government, which is wasteful, inefficient, and inclined toward political favors for special interests.      

That is all today. I look forward to visiting with you next week. In the meantime, please let me know if you have a question. You can call my office at (713) 785-8939 or leave a comment on this post. 

The Tax Cuts and Jobs Act – The Middle Class

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Let’s discuss the impact the new tax law will have on two levels of middle class income. The first example is a school teacher who is single with no children and is making $60,000. In 2017, she will get a standard deduction of $6,350 and a personal exemption of $4,050, so her statutory deductions will total $10,400 and her taxable income will be $49,600. In 2017 her tax liability will be $8,139.

In 2018, if our same teacher makes $60,000, she will get a standard deduction of $12,000 and no personal exemption. Her taxable income will be $48,000 and her tax liability will be $6,500. This is a tax savings of $1,639, or put another way, a savings of 20.1% from 2017 to 2018.

In our second example we have a married couple with two children under age 17. They file jointly and together they make $250,000. They own their home and they have $20,000 in home mortgage interest, $21,000 in real estate tax and sales tax (state and local tax), and $10,000 in charitable contributions. In 2017, their taxable income is $182,800 and their tax liability is $38,069. In 2018, the same family making $250,000 will have taxable income of $210,000 ($250,000 -$20,000 -$10,000 -$10,000). Remember, they only get $10,000 for SALT deductions and personal and dependency exemptions were repealed. Their tax in 2018 will be $34,979. They get a $2,000 child tax credit for each child and the phase-out for joint filers begins at $400,000. This is a tax savings of $3,090 or a savings of 8.1% from 2017 to 2018.

Remember, you can deduct all of your real estate taxes in your business or when related to income-producing property. State and local income taxes are not deductible for a business and only to the extent of $10,000 when combined with all state and local taxes for individuals.

Next week, we will discuss the Tax Cuts and Jobs Act and how it affects those taxpayers with income over $500,000.

That is all today. I look forward to visiting with you next week. In the meantime, let me know if you have a question. Feel free to leave a comment on this post or give me a call to get in touch.

Tax Cuts and Jobs Act

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The new tax law took effect on January 1st, and it is a big win for the American taxpayer. It is too big to cover in one post, so we will be discussing various provisions throughout the year. You will feel it immediately both in your federal withholding and in your quarterly estimated tax payments. The basics include:

  • Rate cuts for all brackets
  • A doubling of the standard deduction
  • A doubling of the child tax credit and a raising of the phaseout starting at $400,000 for MFJ (married, filing jointly)
  • The exemption for the AMT (alternative minimum tax) is increased to $109,400
  • The phaseout begins at $1M for MFJ
  • The phaseout of itemized deductions is gone
  • The unified credit for estates and gifts is doubled to $11.1M per person and the 40% rate stays the same

High income individuals that live in high tax states such as NY, NJ, and CA will not get much of a break. The rate reduction is significantly offset by the fact that they cannot deduct the high state and local taxes that they previously deducted. Say you make $2M and pay $100,000 in state and city tax and then save $40,000 in federal income tax. Now, that deduction and the tax savings are gone, so you cannot say this is a windfall for the wealthy. It is also good economic policy because it does not subsidize high tax states at the expense of the American taxpayer in low tax states. The $10,000 limit on the deduction of state and local tax does not apply to your business or other income producing property.

Regular corporations are getting a rate reduction from 35% to 21%. You may have noticed the stock market is factoring in the new bottom line. Also, foreign profits held overseas are being deemed repatriated at a rate of 15.5% for cash and 8% on other assets. The market gets to figure the effect that will have on values also. For S Corporations, sole proprietors, LLCs, and partnerships, there is a 20% deduction based on the lower of three amounts which is designed to achieve parity with the C corporations. This 20% break is phased out for professional service firms with taxable income between $315,000 and $415,000 for MFJ. The section 179 deduction is being doubled to $1M and bonus depreciation is being increased to 100%. My advice is get in the market.

This is all for today.  If you need more information, please feel free to give me a call at (713) 785-8939 or leave a comment on this post.

Home Equity Loans and Proposition 2

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A proposed amendment to the Constitution of the State of Texas that would loosen restrictions on home equity borrowing comes to a vote on Tuesday, November 7. Known as Proposition 2, this amendment should hold serious interest for homeowners. Below, I outline the history of home equity loans in Texas and analyze this new proposition.

Home Equity Loan and Line of Credit

In the early 1990s, Texans amended the state constitution to allow home equity lines of credit. Prior to the amendment, Texans could only borrow on the equity in their home to finance home improvements. A home equity loan/LOC includes any indebtedness that is secured by a home if the proceeds were not used to purchase, construct, or substantially improve a home. Under the tax law rules, a taxpayer can deduct interest on up to $100,000 of home equity indebtedness that is secured by the taxpayer’s main home or one other home. The proceeds of the loan may be used for any purpose, including the payment of a child’s college expenses, paying off credit cards, or paying for a new car.  

Proposition 2 

On November 7, 2017, voters will again have the chance to amend the Texas constitution regarding home equity loans. I have included the ballot wording and some explanatory comments.  

The proposition reads as follows:

“The constitutional amendment to establish a lower amount for expenses that can be charged to a borrower and removing certain financing expense limitations for a home equity loan, establishing certain authorized lenders to make a home equity loan, changing certain options for the refinancing of home equity loans, changing the threshold for an advance of a home equity line of credit, and allowing home equity loans on agricultural homesteads.”

After talking to my mortgage banker (www.capitalabcfunding.com), I can tell you that this amendment will help reduce your borrowing costs by removing some of the many fees that you pay when you borrow on your home and limiting some of the fees that lenders charge for credit checks, loan applications, and others, as well as making it easier to get a home equity loan. It will also expand the types of agricultural properties that can borrow on their equity.

This amendment will be effective on January 1, 2018, if it is approved by the voters. It takes a 2/3 majority of the Texas House and Senate to get a proposition on the ballot. Then, it is submitted for approval to the qualified voters of the state. A proposed amendment becomes a part of the constitution if a majority of the votes cast in an election on the proposition are cast in its favor.

Now, it is up to you.

FAFSA Tips and Post-Harvey Aid

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It’s time to be thinking about Federal Student Aid. If you need help filling out the FAFSA form, please read on or give me call. Also below, I unpack a few of the tax implications of a House bill designed to provide hurricane and wildfire relief.

Let’s begin.

Helpful Tips on the FAFSA

Do you have children in college? Then the Free Application for Federal Student Aid is the form that you will complete if you want to enter the federal financial aid system. Go to www.fafsa.ed.gov to electronically file if you want a Stafford Loan, a work-study job for your student on campus, a federal grant, or maybe even a little scholarship money from the endowment. You will need your 2016 Form 1040 and a list of your assets. If you need help, please give me a call at (713) 785-8939.

U.S. House Approves $36.5 Billion Aid Package

Last Thursday, October 12th, the House approved a bill that will provide Hurricane Harvey, Irma, and Maria relief as well as wildfire relief, and will bail out the financially troubled National Flood Insurance Program. The bill now awaits consideration by the Senate.

The bill also includes a few tax changes that might benefit you. This legislation allows you to take a casualty loss from these storms without having to itemize. You will also be able to deduct your uninsured personal losses in excess of a $500 threshold without regard to the 10% of adjusted gross income offset that generally applies to get that deduction. I don’t need to tell you how big that could be.

Also of note, the 10% penalty on pre-age-59 ½ withdrawals from retirement accounts is waived, as long as the IRA or retirement plan withdrawals are not greater than $100,000. The regular income tax due on these distributions can be paid over three years. You can also borrow more from your 401(k), up to $100,000, and loan repayments can be deferred. These are some of the changes that may affect you.

Tax Records Lost During Harvey?

If you lost your tax records during the hurricane you can use the Get Transcript tool on IRS.gov to print a summary of your W-2, 1099, and 1098 information. A tax transcript is a summary of key information and not a copy of your return. If you want a copy of an actual return, you must file Form 4506. If you want a copy of your transcript by mail, then you must file Form 4506-T. To expedite the processing and waive the customary fees, write “Hurricane Harvey” on the top of the form.

9 Tips for Reconstructing Records after Hurricane Harvey

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Taxpayers who are victims of a disaster might need to reconstruct records to prove their loss. Doing this may be essential for tax purposes, getting federal assistance, or an insurance reimbursement.

Here are nine things individual taxpayers can do to help reconstruct their records after a disaster:

  1. Taxpayers can get free tax return transcripts by using the Get Transcript tool on IRS.gov, or use their smartphone with the IRS2Go mobile phone app. They can also call (800) 908-9946 to order it by phone.
  2. To establish the extent of the damage, taxpayers should take photographs or videos as soon after the disaster as possible.
  3. If a taxpayer doesn’t have photographs or videos of their property, a simple method to help them remember what items they lost is to sketch pictures of each room that was impacted.
  4. If you lost your car, there are several resources that can help you determine the FMV before the loss. These resources are all available online or at the library: Kelley’s Blue Book, National Automobile Dealers Association, or Edmunds.
  5. Taxpayers can contact the title company, escrow company, or bank that handled the purchase of their home to get copies of their destroyed documents.
  6. If you bought furniture or appliances with your credit card, then you should contact your credit card company or bank for past statements.
  7. Homeowners should review their insurance policy as the policy usually lists the value of the building to establish a base amount for replacement and starting point for determining FMV before the loss.
  8. Absent that, you can go to the HCAD website for a record of the value of your property, both land and improvement.
  9. You can also support your loss with cancelled checks, credit card receipts, photographs on your phone, and videos.

I hope this helps!

Robert T. Stevenson, CPA

Three Easy Ways to Report Your Property Damage

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Harris County homeowners who suffered damage from Hurricane Harvey can report their damage to the Harris County Appraisal District (HCAD) through the following ways:

  1. The HCAD’s upgraded app, available for Apple and Android phones.
  2. By phone at (713) 812-5805. You will need to provide your name, address, phone number, and account number, if you have it, along with the type of property damage and amount of water you received.
  3. You can also email that information to help@hcad.org.

Reporting property damage now will help the appraisal district identify the most damaged neighborhoods and properties to help homeowners next year when property is reappraised.

Remember, your property tax liability is based on the appraised value as of January 1 of each year. Therefore, your tax bill for 2017 is based on your appraised value at January 01, 2017. And likewise, if your home has not been completely repaired as of January 1, 2018, then you should become eligible for a reduced value for 2018.