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.

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—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 Form 4684

As Tax Day draws nearer, I’ve had a number of questions about Hurricane Harvey and casualty loss. Today, I’ll walk you through what you need to file Form 4684 for casualty loss deductions with your 2017 tax return.

Form 4684, Casualties and Thefts was designed especially for storms like Hurricane Harvey. In 2017, you will be able to take an itemized deduction by completing the form and attaching it to your Form 1040. Also, it’s important to know that twenty counties along the Texas Gulf Coast, including Harris County, were Presidentially Declared Disaster Areas. Once the President declares an area a Presidentially Declared Disaster Area, then the IRS can administratively make temporary changes to the law, such as extending the due dates of returns and estimated tax payments, and they can lift the 10% of AGI threshold for casualty losses. And that is what they did. If your home was flooded and your personal possessions were lost in the flood, then you need to complete Form 4684.

Here is what you will need to complete the form:

  • The cost or basis of your home
  • Your insurance or other reimbursement (ie: FEMA)
  • Your fair market value before the storm
  • Your fair market value after the storm

This is the information you will need to complete your casualty loss deduction. If you struggle with any of these items, such as the FMV of your home after the storm, don’t hesitate to ask your realtor or real estate appraiser, or contact the Harris County Appraisal District. If you need any help with any of this, then please give me a call.

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

Three Exceptions to the Three-Year Statute of Limitations for Tax Assessments & Refund Claims

Statutes of limitations are provisions of law that require actions to be initiated for prior events within a certain maximum prescribed time period. Therefore, if an action is to be brought or pursued for a prior event, it typically must be initiated before the maximum prescribed time period expires. The purpose of statutes of limitations is to allow for the best evidence that is available to be presented in the pursuit of the action. As time expires, evidence may become lost or unavailable, witnesses may no longer be available, and prosecuting such untimely actions and defending them will become very difficult. Therefore, statutes of limitations are designed to compel action be initiated before evidence becomes unavailable. Failure to initiate such action within this specified maximum prescribed time period is a valid defense and precludes the pursuit of the action.

Statutes of limitations apply for federal income tax matters, as well as other legal matters, civil and criminal. The Internal Revenue Code prescribes specific provisions for when prior tax matters may be pursued by either the IRS or the taxpayer. It depends on whether the IRS is seeking an additional assessment of tax or the taxpayer is seeking a claim for refund. The general rule for imposing additional tax or claiming a refund is three years from the date the tax return is filed or the due date, whichever is later.

As with any rule, there are exceptions.

There are two exceptions from the general rule for IRS assessment of additional tax. The first exception applies to the substantial omission of income. In the case of substantial omission of income, the statute of limitation for the general rule described above is extended to six years. For this exception to apply, substantial omission of income is defined as more than 25% of the gross income is omitted on the tax return. For example, if the taxpayer has $126,000 of gross income and only reports $100,000, then this will trigger the six-year statute of limitation. If the taxpayer had reported $102,000, then the general rule three year statute of limitation would still apply. It is noteworthy to recognize that the six-year statute of limitation applies only to the substantial omission of income and not to other items such as claiming excessive deductions, etc.

The second exception to the general rule for assessments applies to fraud (the willful intent to evade tax) or to tax returns not filed at all. In either of these cases there is no statute of limitations. There is no time limit for the IRS to assess additional tax or initiate a court action. The burden of proof generally remains with the IRS in cases of fraudulent tax returns or tax returns not filed.

The third exception has to do with how long a taxpayer has to claim a refund for the overpayment of tax. A claim for refund must generally be made within three years from the date the tax return was filed or the due date, whichever is later. If no tax return is filed, then the claim for refund must be made within two years from the date the tax was paid. Any tax deducted and withheld from the wages of a taxpayer is treated as paid on April 15. My advice: If you have a refund, then be sure to file within two years of the due date of the return.

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.