New Tax Law Changes Will Impact Most Taxpayers

On Friday, the President signed into law the Further Consolidated Appropriations Act, 2020. This Act not only prevented a government shutdown, but also passed many tax provisions.

The Act passed the following:

  • Retroactive reinstatement for the mortgage insurance premium (PMI) deduction and is extended through 2020.
  • Retroactive reinstatement for the exclusion of qualified mortgage debt and is extended through 2020.
  • Retroactive reinstatement for the above-the-line qualified tuition and related expenses deduction and is extended through 2020.
  • Retroactive reinstatement for the construction of energy efficient homes and is extended through 2020.
  • The medical expenses deduction returns to 7.5% for 2019 and 2020.
  • The employer credit for paid family and medical leave and the work opportunity credit has been reinstated for 2020.

Repeal of 3 Affordable Care Act provisions
In addition, the Act repeals three ACA-related taxes:

  1. The 2.3% excise tax on medical devices will be repealed starting on Jan. 1, 2020.
  2. The excise tax on high-cost employer-sponsored health plans, also known as the“Cadillac Tax” will be repealed starting on Jan. 1, 2020.
  3. The excise tax on health insurance providers, known as the Health Insurance Tax, will be repealed starting on Jan. 1, 2021.

Changes to retirement plans
The Act also included the SECURE Act. Starting in 2020, the age for required minimum distributions will be 72. The Act also removes the age limit for contributions to traditional IRAs.

This legislation does not affect the rules for 2019. If you’re at least 70½ in 2019, you must take a required minimum distribution. And you’re not allowed to make contributions to your traditional IRA for 2019 after age 70½.

In addition, starting in 2020, new parents can take penalty-free distributions from a 401(k), IRA or another qualified retirement plan within a year after a birth or adoption.

The Act eliminated the “stretch IRA,” which allowed beneficiaries of IRAs and qualified plans to withdraw all money from inherited accounts over their lifetime. Starting in 2020, distributions must be taken with ten years.

Disaster penalty relief
For retroactive relief, starting Jan 1. 2018, through Feb. 20, 2020, the Act allows individuals who suffer losses in qualified disaster areas to take up to $100,000 from tax-favored retirement plans to help pay for recovery costs without being subject to the 10 percent early withdrawal penalty. The Act also provides an automatic 60-day filing extension; therefore, tax professionals no longer have to wait for the IRS to issue relief rules.

American Rescue Plan Act

This from the National Association of Tax Professionals:

As an extension of the CARES Act, weekly unemployment benefits have been extended through Sept. 6, 2021,
with a weekly benefit amount at $300. The first $10,200 ($20,400 if MFJ) of unemployment benefits for 2020 will be
nontaxable for taxpayers with adjusted gross income of less than $150,000. If adjusted gross income is $150,000
or greater, the full $10,200 or $20,400 of unemployment compensation becomes taxable.
Reduces premiums payable by providing premium assistance from April 1, 2021, through Sept. 30, 2021. Federal
subsidy coverage for COBRA premiums increases to 100%. If required to notify a group health plan, failure to do
so may result in $250 penalty for each failure.
2021 recovery rebates for individuals
A 2021 advance recovery rebate or a third economic impact payment (EIP3) of $1,400 ($2,800 MFJ) will be issued
to each eligible individual plus $1,400 to each dependent (including adult dependents).
The payment will fully phase out when income reaches $80,000 for single filers, $120,000 for heads of household
with one child, and $160,000 for joint filers or surviving spouse.
An eligible individual is anyone except:
• Any nonresident alien individual
• Any individual who is a dependent of another taxpayer at the beginning of the calendar year
• An estate or trust
The recovery rebate credit is based on the 2019 or 2020 tax return and will be reconciled on the 2021 tax return.
For payments based on the 2019 return, the bill contains a provision that allows for an additional payment if the
advance of the recovery rebate is greater based on the taxpayer’s 2020 return.
Child tax credit
Special rules for 2021 include an expansion of the credit from $2,000 to $3,000 per eligible child under age 18
($3,600 per child under age 6). The fully refundable credit, with 50% of the credit issued as advance periodic
payments starting in July, will be reconciled on the 2021 tax return. For 2021, the increased credit amount
(additional $1,000 or $1,600 per-child in excess of the present-law $2,000 per-child) begins to be phased-out at
$75,000 ($150,000 for MFJ and SS and $112,500 for head of household). Once the increased credit amount is
reduced, the credit plateaus at $2,000, and the phaseout begins at $200,000 ($400,000 for MFJ).
©2021 | American Rescue Plan Act – H.R. 1319 2
Earned income credit
For 2021, the minimum age to claim the EIC for taxpayers without children (childless EIC) generally is reduced from
age 25 to age 19 (except full-time students). The maximum age limit of 65 for claiming the childless EIC has been
eliminated. The credit and phaseout percentage increases from 7.65% to 15.3% for an individual with no qualifying
children. Taxpayers may use their earned income from the 2019 tax year to determine their EIC for the 2021 tax
year if the 2021 earned income was less than the 2019 earned income.
The disqualified investment income limit also increases from $3,650 (2020) to $10,000.
Dependent care assistance
For 2021, the credit is fully refundable and the dollar limit for eligible expenses increases from $3,000 to $8,000 for
one eligible child, and from $6,000 to $16,000 for two or more eligible children. The maximum credit rate increased
from 35% to 50% and the AGI limitation increases from $15,000 to $125,000. Taxpayers with an AGI of $125,000
to $400,000 will receive a partial credit.
The exclusion for employer-provided dependent care assistance increases from $5,000 to $10,500 ($5,250 for MFS).
Paid sick and family leave credits
Extends the paid leave credits from April 1, 2021, through Sept. 30, 2021, for eligible employers providing sick
or family leave that otherwise would be required if the Families First Coronavirus Response Act applied after
March 31, 2021. Several new provisions also take effect after March 31, 2021. For example: allows paid leave
credits to obtain COVID-19 vaccine, restarts the 10-day limit for qualified sick leave wages and increases the
qualified family leave wages limit from $10,000 to $12,000 in total.
Employee retention credit
Extends the employee retention credit (ERC) through Dec. 31, 2021, for wages paid after June 30, 2021, and before
Jan. 1, 2022. After June 30, 2021, the ERC offsets the employer’s share of Medicare tax.
Premium tax credit
Reduces health care premiums for low- and middle-income families by increasing the Affordable Care Act’s (ACA)
premium tax credit (PTC) for 2021 and 2022. For 2020, no repayment is required for taxpayers receiving excess advance PTCs. I’m waiting to hear more clarification on this one– it sounds too good to be true…
The bill also provides that if a taxpayer receives unemployment compensation (UC), they can use the rates as if
their household income tier is 133% of the federal poverty line.
Modification of treatment of student loan forgiveness
Provides special rule for discharges in 2021 through 2025 that the discharge of student loans as cancellation
of debt is not included in gross income. Student loan borrowers who made qualified student loan payments
after March 13 could have those payments refunded if they notify their loan servicer. Tax refund and/or wage
garnishment has been suspended through Sept. 30, 2021, for those who have defaulted on federal student
loan debt.
Tax treatment of targeted Economic Injury Disaster Loan (EIDL) advances
Excludes amounts received under §331 of the Economic Aid to Hard-Hit Small Business, Non-profits, and Venues
Act from gross income and treats them as tax exempt income for partnerships and S corporations. Allows
deductions for expenses paid with targeted EIDL advances, does not reduce tax attributes and allows basis
Tax treatment of restaurant revitalization grants
Excludes amounts received from the Small Business Administration (SBA) under §5003 from gross income and
treats them as tax exempt income for partnerships and S corporations. Allows deductions for expenses paid with
such amounts, does not reduce tax attributes and allows basis increases.
Modification of exceptions for reporting of third party network transactions
(1099-K Reporting)
After 2021, the de minimis exception for reporting a transaction changes from $20,000 to $600. Clarifies that
reportable transactions only include those for goods and services, which will apply to transactions after the
enactment of this bill.

COVID-19 Relief (CARES Act)

I just completed a webinar on the COVID-19 Relief (CARES Act) that was just signed March 27. While we’re waiting on some details and clarification, here it is in a nutshell:

  1. Due dates to file and pay your tax returns have been extended from April 15 to July 15 (That doesn’t apply to Partnership and S Corp returns, as their due dates were March 15). If you need additional time to file, you can file an extension by July 15 to give you until October 15, 2020. But the deadline to PAY your taxes is still July 15.
  2. The due date for paying your first estimated quarterly income tax has been extended to July 15. BUT, the 2nd estimated payment is still June 15. The 3rd payment is still due Sept 15, as is the 4th quarter payment due on Jan 15, 2021.
  3. If you already set up your tax due payment for April 15, you can cancel it and have it pay on July 15. You can go to and cancel it online. NOTE: Not all states are conforming to Items #1, 2 and 3! Please check with your individual state.
  4. Employers with less than 500 employees can receive a 100% payroll tax credit for providing emergency sick paid leave (up to 2 weeks) or emergency family and medical leave (up to 10 weeks) to employees impacted by COVID-19 with qualifying reasons.
  5. Small businesses can get low interest loans of up to $2 million.
  6. Taxpayers on installment agreements, in debt collections or applying for an Offer in Compromise will see some relief, as all of those have been suspended to July 2020, including private debt collection and automatic liens. Check with your tax accountant to see if you’re in that group.
  7. Individuals laid off or with reduced hours can apply for unemployment and also receive additional federal unemployment benefits of an additional $600 for up to 39 weeks.
  8. If you have a retirement account (or IRA) and need funds for COVID-related hardships, you can withdraw up to $100K, without incurring the 10% penalty. While the distribution is taxable, you can elect to pay the tax over a 3 year period, OR you can pay back the IRA (like a direct rollover) and avoid all taxes. NOTE: Again, these benefits apply to the IRS and may not apply to your individual state.
  9. The Required Minimum Distribution (RMD) has been waived for 2020. Also, if you want to contribute to your IRA or HSA for 2019 taxes, the deadline has been extended from APril 15 to July 15.
  10. For 2020, charitable contributions of up to $300 will receive an ABOVE-LINE deduction, meaning it reduces your adjusted gross income and is not an itemized deduction.
  11. The stimulus payments of $1,200 (single), $2,400 (married) and $500 (per child) are actually tax credits, so they are NOT taxable. The phaseout for Singles begins at $75K and ends at $99K; for head of household, $112.5K – $146.5K; married, $150K – $198K.
  12. For businesses, up to 50% of qualified payroll can have their payroll taxes deferred- 1/2 to Dec 2021, and the other 1/2 to Dec 2022.
  13. Net Operating Losses can now be carried back for 2018, 2019 and 2020.
  14. Student loan payments suspended through Sept 30, 2020. If you are current, you have to request the extension. If you are delinquent, it will automatically be extended.
  15. Can defer your mortgage payments up to 120 days, but contact your mortgage company, as it’s not automatic.
  16. Federally-backed loans- can request a forbearance for up to 180 days.
  17. No new foreclosures for delinquent taxpayers; no new evictions. Eviction limits seem to be state-by-state at this time, so always check with your local representatives.
  18. That’s it for now– I’ll keep you posted as we get more info and clarification!


Relief For Small To Mid-size Businesses For Coronavirus-Related Reasons

Per the IRS today:

Today the U.S. Treasury Department, Internal Revenue Service (IRS), and the U.S. Department of Labor (Labor) announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees. This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.

The Act will help the United States combat and defeat COVID-19 by giving all American businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members. The legislation will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Key Takeaways

  • Paid Sick Leave for Workers 
    • For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable.
  • Complete Coverage
    • Health insurance costs are also included in the credit.
    • Employers face no payroll tax liability.
    • Self-employed individuals receive an equivalent credit.
  • Employers receive 100% reimbursement for paid leave pursuant to the Act.
  • Fast Funds
    • An immediate dollar-for-dollar tax offset against payroll taxes will be provided
    • Where a refund is owed, the IRS will send the refund as quickly as possible.
    • Reimbursement will be quick and easy to obtain.
  • Small Business Protection

Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.

  • Easing Compliance
    • Requirements subject to 30-day non-enforcement period for good faith compliance efforts.

To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.


The Act provided paid sick leave and expanded family and medical leave for COVID-19 related reasons and created the refundable paid sick leave credit and the paid child care leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and Dec. 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.

Paid Leave

The Act provides that employees of eligible employers can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis. An employee who is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services can receive two weeks (up to 80 hours) of paid sick leave at 2/3 the employee’s pay. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional 10 weeks of expanded paid family and medical leave at 2/3 the employee’s pay.

Paid Sick Leave Credit

For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days.

For an employee who is caring for someone with Coronavirus, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Child Care Leave Credit

In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Prompt Payment for the Cost of Providing Leave

When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.

Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced next week.


If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.

Small Business Exemption

Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Non-Enforcement Period

Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. Labor will instead focus on compliance assistance during the 30-day period.

Opportunity Zone Funds – The New “Rock Star” of Real Estate?

I just read articles in both “Barron’s” and “The Real Deal New York” extolling the virtues of “Opportunity Zone Funds.” This tax-break program is part of the Tax Cuts And Jobs Act (also known as the Tax Reform Act) and gives investors an incentive to invest in funds that invest in “qualified opportunity zones” or designated low-income neighborhoods. It’s a win-win: neglected, deteriorating neighborhoods get some much-needed attention, and investors get a tax break. According to the Economic Innovation Group, there are approximately $6 trillion of unrealized capital gains by both individuals and corporations that could be plowed into these funds rehabbing neighborhoods.

Here’s the new law in a nutshell: You incur a capital gain by selling an appreciated asset (stocks, real estate, etc.). You then have 180 days to take that money and put it into a qualified opportunity fund. If you hold onto the investment for 5 years, you can deduct 10% off your capital gains bill. After 7 years, your deduction increases to 15%. And, if the investment is held for 10 years, you pay ZERO taxes on the gain!

Because of the amazing tax incentives, these opportunity zones are popping up like popcorn. I’m waiting on clarification as to what actually constitutes the actual “fund.” Does it have to have a minimum investment? Does it have to be publicly traded? Can a few investors put together their funds into an LLC that invests in a small apartment building in an opportunity zone, or does it have to be in an entire neighborhood? Either way, the opportunities are amazing, especially for those investors who had large returns in the stock market.


Year-End Tax Tips From The Big Bear Tax Lady

With 2018 almost behind us, now is the time to think about what you can do to reduce your tax bite:

–The new Tax Reform Act almost doubled the Standard Deduction to $12,000 (single), $18,000 (head of household) and $24,000 (married filing jointly). According to the IRS, the number of taxpayers Itemizing Deductions beginning in 2018 will be about 16 million (compared to 46 million in 2017).  Some deductions that you enjoyed taking in the past may not be enough to meet the new threshold, but there are still some ways to use them. For example, if you are 70 1/2 or older and have an IRA account, you must take a required minimum distribution (RMD) or be faced with a 50% tax penalty. If you donate money to charity, you can choose to have the donation come directly from your IRA (up to $100K per year). By doing so, the distribution does not count as income on your tax return, yet you still get to help your favorite charity on a tax-free basis. 

–But if you’ll still be able to itemize your deductions this year, any donation you make to a qualified charity before December 31, 2018 (includes cash, check OR credit card) will be deductible on your 2018 tax return. If you donate $250 or more to an individual charity, make sure you receive an acknowledgment letter or statement from the organization. And here’s another one: Think about donating appreciated assets (such as stocks, mutual funds, real estate, etc.) to charity instead of cash before the end of 2018. You can deduct the Fair Market Value of the asset AND not have to pay Capital Gains tax. Example: Say you purchased XYZ stock for $100 years ago, and now it’s worth $1,000. If you sold it, and gave the amount to charity, you’d have to pay capital gains tax on $900, and then get a charitable deduction of $1,000 (for a net $100 benefit). BUT, if you gave the stock directly to the charity, you pay ZERO Capital Gains tax AND get a deduction of $1,000!

–Tax Tip for teachers: While you still get to deduct up to $250 in classroom expenses, unreimbursed expenses greater than that will no longer be deductible as Employee Business Expenses.  Here’s the tip: Unreimbursed classroom supplies, like crayons, Kleenex, pencils, etc. can be separated out and deducted as Charitable Contributions (which are still deductible if you itemize deductions) as long as you get a donation acknowledgment from your school. Start the process now!

–If you use your vehicle for business, you must keep a mileage log for both total AND business miles driven, or the IRS can disallow your deduction. A tip I give to my clients is to always schedule a vehicle service (oil change, tire rotation, etc.) around December, so that you have an IRS-approved documentation of your vehicle’s annual odometer reading.

–If you have an Individual Retirement Account (IRA), you have until April 15, 2019 to contribute up to $5,500 ($6,500 if you’re age 50 or older) and have it count for tax year 2018. (That number goes up in 2019 to $6,000 and $7,000).

–If you’ve deducted medical expenses in the past, and now will no longer be itemizing deductions, here’s a way to still get a tax break on your medical expenses. If you have a high-deductible health insurance plan, think about setting up a Health Savings Account (HSA) before year-end. If you have a single plan, you can contribute up to $3,450 ($6,900 for a family plan). If you’re age 55 or older, you can contribute an additional $1,000. The contributions are tax-deductible, and you can use the monies to pay for IRS-qualified unreimbursed medical, dental and vision expenses. It’s not a “use-it-or-lose-it” plan– the funds stay in your account year after year. You need to set it up in 2018, but you have until April 15, 2019 to make your contribution for 2018. I highly recommend this to all my clients who have an HSA-compatible health insurance plan!

–If you’re self-employed and need more business deductions for 2018, think about stocking up on supplies, purchasing new equipment, or pre-paying some expenses like advertising or insurance. As long as you make these purchases by December 31, 2018 by either cash or credit card, you can deduct them in 2018.

–One of the most exciting (and most complicated) portion of the Tax Reform Act is the new 20% deduction for Qualified Business Income (QBI) from pass-through entities. QBI includes income from S Corporations, Partnerships, Trusts, Sole Proprietorships and Rental Income. Basically, the first 20% of your net business income is tax-free! There are limitations depending on your taxable income, as well as additional limitations if your business is a specified service business. For example, if your taxable income is below $315K (married filing jointly), you get the entire deduction. Once you exceed that amount, there is a wage limitation to consider. For service businesses, the deduction starts to phase out after the $315K taxable income, and goes to zero after $415K. If you believe your taxable income may exceed those amounts, check with your tax professional ASAP to look for ways to reduce that amount. Think about putting more money into your retirement account, hiring your kids, prepaying expenses, etc.

–If you have a business, evaluate which business entity is best for you with the new tax plan. For example, if you have an S Corporation that puts you in a tax bracket greater than the 21% flat rate for C Corporations, it may be time to make a switch. There are tax advantages and disadvantages for both (for example, the 20% QBI Deduction doesn’t apply to C Corporations), but it all depends on your situation. Of course, don’t do anything without consulting with your tax professional first!

One final note: Remember, the states do NOT conform with the new Tax Reform Act, so, while you may not be itemizing deductions for your federal tax return, you may still need to do so for your state return!

Combat-injured disabled veterans may be due a refund

FYI from the IRS today:

The IRS is alerting certain veterans that they may be due a credit or refund. This is a result of the Combat-Injured Veterans Tax Fairness Act passed in 2016. It affects veterans who received disability severance payments after January 17, 1991, and included that payment as income.

Here is what these veterans should know:

  • Veterans who included their disability severance payments as income should file Form 1040X, Amended U.S. Individual Income Tax Return.
  • The veterans will file Form 1040X to claim a credit or refund of the overpayment attributable to the disability severance payment.
  • These veterans received a one-time, lump-sum disability severance payment when they separated from their military service.
  • Most of these veterans will have recently received a letter from the Department of Defense with information explaining how they should claim the related tax refunds.
  • Veterans can submit a claim based on the actual amount of their disability severance payment. However, there is a simplified method where veterans can instead choose to claim a standard refund amount. This amount is based on the calendar year in which they received the severance payment:

    – $1,750 for tax years 1991 – 2005
    – $2,400 for tax years 2006 – 2010
    – $3,200 for tax years 2011 – 2016

  • Claiming the standard refund amount is the easiest way for veterans to claim a refund, because they do not need to access the original tax return from the year of their lump-sum disability severance payment.
  • The veteran must mail the claim generally by the later of these dates:

    – One year from the date of the Department of Defense notice
    – Three years after the due date for filing the original return for the year the disability severance payment was made
    – Two years after tax was paid for the year the disability severance payment was made.

  • Veterans eligible for a refund who did not get a letter from DoD should visit the Defense Finance and Accounting Service and IRS’s Combat-injured disabled veterans page for more information on how to file a claim.

Protect Yourself From Scammers Claiming To Be From The IRS

I continue to sound like a broken record when it comes to protecting taxpayers from scammers, but it needs to be repeated. Obviously, these scams must be working for the perpetrators, as they continue these efforts with a vengeance! Here’s some info on what the IRS does and does not do:

The IRS Does Not:

  • Call to demand immediate payment using a specific payment method, such as a prepaid debit card, gift card or wire transfer.
  • Demand taxpayers pay taxes without the opportunity to question or appeal the amount owed.
  • Threaten to bring in local police, immigration officers or other law enforcement to have someone arrested for not paying.
  • Threaten to revoke someone’s driver’s license, business licenses or immigration status.

The IRS Does:

  • In general, first mail a bill to any taxpayer who owes taxes.
  • Normally initiate contact with taxpayers through mail delivered by the United States Postal Service.
  • Present official identification when visiting a taxpayer. Taxpayers have the right to see these credentials, and – if they would like – the representative will provide them with a dedicated IRS phone number for verifying the information and confirming their identity.
  • Call or visit a home or business under certain circumstances. This includes when a taxpayer has an overdue tax bill, to secure a delinquent tax return or a delinquent employment tax payment, or to tour a business as part of an audit or criminal investigation. Even then, taxpayers will generally receive several letters from the IRS in the mail first.
  • Assign certain cases to private debt collectors, but only after written notice is given to the taxpayer and their appointed representative.
  • Offer several payment options. Payment by check should be payable to the U.S. Treasury and sent directly to the IRS, not a private collection agency.

Maybe Some Tax Relief For Those Who Live In High-Tax States?

For personal state, local and property taxes paid beginning 2018, taxpayers are only allowed to deduct up to $10,000 on their tax returns. While the majority of taxpayers will not be affected by this change, some in the high-tax states (CA, NY, CT, IL, for example) may see their deductions reduced.

In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay.  For example, the state of New York is considering having schools and some local government agencies set up nonprofit foundations, where the taxpayer makes a tax-deductible donation, and, in exchange, receives a tax credit. The goal is to allow taxpayers to characterize such transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

A loose version of this is already available for teachers who incur unreimbursed classroom expenses that they don’t get to deduct because they don’t exceed the 2% adjusted gross income floor. Since donating to schools is deductible for charitable purposes, teachers can get an acknowledgement letter from the school and claim these expenses as charity. (I’ve discussed this in a prior blog)

The IRS is currently reviewing this and intends to publish clarifications as to whether or not this is allowable. I’m curious to know what they’ll say. From a taxpayer point of view, New York’s proposal appears desirable as it will create more deductions, AND the taxpayer will at least know exactly where his or her money is going. We shall see if it passes the IRS “smell test.”

Another Reason To Be A Real Estate Investor

You all know how much I love, love LOVE Real Estate. In my opinion, it’s a premier vehicle for building wealth, as well as providing you with a steady income stream. Real Estate also provides wonderful tax deductions, which I’ve discussed in detail in my prior posts.  But did you know that the 20% Qualified Business Income Pass-Through Deduction now also applies to Schedule E Rental Income? YES! This was a last-minute addition to the Tax Reform Act. Sweet.

In a nutshell, the 20% Pass-Through Income Deduction allows you to take 20% of taxable income (subject to certain limitations) as a deduction on your tax return beginning 2018. “Pass-Through Income” includes income from Schedule C, Schedule E, S Corporations and Partnerships.

When discussing tax strategy with your tax accountant, make sure you include this new bit of information.