Category: Federal Government

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 Personal and dependent exemptions are repealed.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deductions are limited to $10,000 plus home mortgage interest of $39,000, and personal and dependency exemptions were repealed.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. 

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.

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

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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

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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.

A By-Product of the Affordable Care Act

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I don’t know if anyone has noticed, but healthcare – and the Affordable Care Act in particular – has been in the news quite a bit lately.

That got me thinking about employer responsibility requirements.

Maybe you’ve already heard about these requirements. Under the ACA, “large” employers with 50 or more full-time or full-time equivalent employees are required to offer healthcare to all of their full-time employees. If they fail to comply, the employer must pay a $2000 penalty per employee.

For most companies, this isn’t too big of a deal. Either you’re a small business and don’t need to worry about this mandate, or you’re large enough that you can afford to offer your employees health insurance. (In fact, the Kaiser Family Foundation reported back in 2013 that more than 9 out of 10 businesses with over 50 full-time or full-time equivalent employees already offered healthcare before the ACA took effect.)

But I have a number of business clients hovering right around 50 full-time employees. They exist in an unfortunate sweet spot – they’re too big to be small, and too small to comfortably afford to offer comprehensive benefits. Some of these businesses can barely make payroll every two weeks as it is – there’s no way they could take on the added expense of paying for health insurance for their employees and their dependents. What’s more, every person they have in their employ is vital. There are no excess employees.

It puts me in an uncomfortable position. I feel a professional obligation to my clients to advise them to get below 50 employees. But even though that’s the best business decision, it’s not a very nice human decision. I don’t want anyone to lose their livelihood. To make matters worse, the first people to go are usually younger or less skilled workers, often on the first rung of the ladder of success. People like my kids. And by losing their jobs, they’ll lose their means of support and could end up living with their parents or depending on social programs.

But if my clients can’t afford to offer health coverage, I can’t in good faith recommend that they suffer the consequences and pay the $2,000-per-employee fine. What’s more, the Affordable Care Act has effectively made tax preparers like me the compliance officers of the federal government. It is the tax preparer who must indicate on the return that the taxpayer did not comply with the law, and it is the tax preparer who will compute the shared responsibility payment.

I guess everyone in Washington is right: Healthcare is hard.

I’d love to hear what you think: Should the employer responsibility requirements stay or should they go?