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.

A Gift That Lasts a Lifetime – The Roth IRA

You should consider giving your child or grandchild a Roth IRA.  

In 2018, you can contribute up to $5,500 to a Roth IRA. The contribution cannot exceed the child’s earnings and if the child has no earnings, you should consider filing a Schedule C with their return and reporting and paying tax on an amount equal to their contribution up to the maximum. The $5,500 pay-in for your child or grandchild counts against your $15,000 gift tax exclusion ($30,000 if you are married).

Some of the advantages and disadvantages of the Roth IRA are…

  • The earnings grow tax deferred and, when taken out at age 59 ½, the entire distribution is tax free.
  • The original contributions are always tax free, even if you withdraw them before age 59 ½.
  • The contributions to a Roth IRA are not tax deductible.

When your child grows up she can continue the contributions…

  • When the child reaches age 50 she can contribute an additional $1,000 or $6,500.
  • When your child reaches age 70 ½, she will not be required to make minimum distributions.
  • If your child is single, the allowable contribution begins to phase out with adjusted gross income between $120,000 and $135,000… and if she’s married, the allowable contribution phases out between $189,000 and $199,000.
  • She can make contributions after age 70 ½.
  • She is not required to take distributions from her Roth IRA… ever.
  • To avoid the 10 percent penalty and any income tax on the earnings, there must not be any distributions during the 5 year period beginning with the first tax year a contribution was made, except if made on or after attaining age 59 ½, the individual’s death or disability, or to pay for first-time home buyer expenses.

I don’t need to tell you that the IRA could grow for 45 to 50 years and when she reaches age 59 ½ she could make withdrawals tax free. You should probably talk to your financial advisor to get the advice you need to reach your goals. Call me if you need a recommendation.

That is all today.  I look forward to visiting with you next week.  Please don’t hesitate to reach out if you have a question—you can reach me 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.

Attention Small Business Owners: Don’t Forget Your Franchise Tax Report

Everyone seems to remember their federal tax returns, but for small business owners, state tax returns are also due. If you have a small business and you filed Articles with the Secretary of State to get state law protection in some form, such as an LLC, or a corporation, or another form of protection suitable to your needs, then you will need to file a Texas Franchise Tax Report and a Public Information Report by May 15, 2018.

These reports must be filed electronically and to file electronically you must have your Webfile Number. The Texas Comptroller of Public Accounts sent you a reminder last week that your Franchise Tax Report is coming due. This reminder will have all the information your CPA (or you) will need to file the return electronically, including your Webfile Number. Please be sure to keep this form and get it to your CPA as soon as possible along with your federal tax information — and definitely before May 15.

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.

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.