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.

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.

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.

Why is the Deadline April 17 this Year?

This tax season, April 15 falls on a Sunday and Monday, April 16 is Emancipation Day. Emancipation Day is a holiday in Washington D.C. to mark the anniversary of the signing of the Compensated Emancipation Act, which President Abraham Lincoln signed on April 16, 1862. It is annually held on April 16 and is a legal holiday in Washington D.C., and it has the effect of nationally extending the due date for filing your personal and trust income tax returns. The Compensated Emancipation Act freed about 3,000 slaves in Washington D.C. in 1862, but slavery did not officially end in the United States until after the Civil War in 1865, when the House passed the Thirteenth Amendment to the U.S. Constitution.

If you don’t file your return by the due date or you don’t get an extension and you owe tax, then you will be subject to the late filing penalty and the late payment penalty. Together, they add up to 5% per month, or fraction thereof, up to a maximum of 25% of your unpaid tax. Please give me a call if you would like to file for an extension of time to file your return. If you know that you will owe additional tax with your return, then you must pay your tax with the extension to avoid the above penalties. Remember, this is an extension of time to file, not an extension of time to pay; you will have six months to get the job done—until October 15, 2018. See you soon.

That is all today. I look forward to visiting with you next week. Let me know if you have a question—you can send an email to robert@robertstevensoncpa.com or call (713) 785-8939. You can also leave a comment on this post.

Hurricane Harvey Casualty Loss and NOLs

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?

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

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. 

Tax Cuts and Jobs Act

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.

Is That Knock at the Door Someone From the IRS, or Someone Scary?

Happy Halloween! Read on for an update on the federal aid package for hurricane and wildfire victims. Plus, I teach you how to distinguish an IRS employee form a common scammer—or a neighborhood trick-or-treater.

Disaster Aid Package is Signed by the President

In my October 17 post, I discussed the $36.5 billion aid package for hurricane and wildfire victims that had passed in the House. It finally passed in the Senate and President Trump signed the bill on October 26, 2017. I also mentioned that the financially troubled National Flood Insurance Program would be bailed out—it received approximately $17 billion. I have heard people complain that their loss far exceeded their insurance reimbursement and I have also heard the uninsured speak of how difficult it was to get paid for their loss from FEMA. We now understand that there wasn’t enough aid to go around. Due to this current infusion of aid for disaster relief in Texas, Florida, Puerto Rico, California, and the U.S. Virgin Islands, I would suggest you go online again.

It’s Halloween! Is That Knock at the Door Someone From the IRS, or Someone Scary?

Children knock on doors pretending to be spooks and movie characters. Scammers don’t limit their impersonations to just one day. People can avoid falling victim to scammers by knowing how and when the IRS does contact a taxpayer in person. These 8 tips can help you determine if an individual is truly an IRS employee.

1. The IRS initiates most contacts through regular mail delivered by the USPS.
2. There are special circumstances when the IRS will come to a home or business. These are:

  • When a taxpayer has an overdue bill.
  • When the IRS needs to secure a delinquent tax return or a delinquent payroll tax payment.
  • To tour a business as part of an audit.
  • As part of a criminal investigation.

3. Generally, home or business visits are unannounced and are made by IRS Revenue Officers.
4. IRS Revenue Officers carry two forms of identification. Both forms have serial numbers, and taxpayers can ask to see both IDs.
5. The IRS can assign certain cases to private debt collectors, but the IRS does this only after giving written notice to the taxpayer or their appointed representative. Private debt collection agencies will never visit a taxpayer at their home or business.
6. The IRS will not ask a taxpayer to make a payment to anyone other than the “United States Treasury.”
7. IRS employees conducting audits may call taxpayers to set up appointments, but only after notifying them by mail.
8. IRS criminal investigators may visit a taxpayer’s home or business unannounced while conducting an investigation. These are federal law enforcement agents and they will not demand any sort of payment. At this stage, you should have a tax attorney and privileged communication.

Taxpayers who believe they were visited by someone impersonating the IRS can visit IRS.gov for information on how to report it.

FAFSA Tips and Post-Harvey Aid

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.