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.

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. 

The Tax Cuts and Jobs Act – The Middle Class

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.

3 Common Tax Return Myths

Nobody wants to be the target of an IRS audit. Fear of an audit leads taxpayers to believe myths about what may or may not catch the eyes of the IRS. Unfortunately, these misconceptions could steer taxpayers toward greater audit risk and a higher tax liability. Below, I unpack three widespread individual tax return myths — and reveal the truth behind them.

Myth #1: Extending an Individual Return Increases Your Chances of Being Audited

The IRS offers an automatic six month extension to all individuals with no explanation necessary. If the IRS viewed extended returns as risky, then there would be rules in place to restrict extensions. Quite the opposite is true — the IRS makes it very easy for individuals to file extensions.

Individuals may rush to file their personal returns out of fear that they will be penalized for an extension, even if their returns are incomplete or inaccurate. This behavior may result in higher audit risk if the IRS catches the inaccuracies. Instead, taxpayers should take the time to collect and review their tax information to ensure they have included everything. If that involves filing an extension, then it is better to extend than to file without all of the information.

While an automatic extension extends your time to file your income tax return, it does not extend the time you have to pay your tax. If you expect to owe additional money with your income tax return, then you will need to pay all tax due when you file your extension.

Myth #2: Getting a Large Refund Means You Are Maximizing Deductions and Minimizing Risk

A large income tax refund may simply mean that you are over withholding on your Form W-2 or overpaying your estimated taxes. That refund is actually interest-free money that you overpaid to the government.

Be leery of those who brag about their IRS Refunds. Rather than optimizing deductions, they may be getting back money that they had over withheld. Discuss your personal circumstances with your CPA to ensure that you maximize your deductions.

Large refunds have now become potential red flags for the IRS. With the drastic increase in identity theft, the IRS is now on the lookout for returns seeking large refunds to ensure that those returns are legitimate.

Myth #3: Individuals Should Not Take the Home Office Deduction Due to Audit Risk

Unlike in the past, working from home is very common today due to technology and the savings to companies in office space. Therefore, remote employees and the self-employed do not necessarily increase their audit risk.

There are some rules to consider. First, individuals can only claim space used exclusively and regularly for business. Also, the home office deduction is available only to individuals who do not have nearby access to a physical office location. Also, the deduction is only allowed to the extent of profit in the business.


If you have additional tax questions, give me a call at (713) 785-8939. I’d love to hear from you.