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!

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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.

From the IRS: Phone Scams Pose Serious Threat; Remain on IRS ‘Dirty Dozen’ List of Tax Scams

I continue to sound like a broken record, but the scams from IRS impersonators is getting more aggressive than ever.

The Internal Revenue Service reminded taxpayers to be careful with continuing aggressive phone scams as criminals pose as IRS agents in hopes of stealing money. These continuing phone calls remain a major threat to taxpayers and remain on the annual IRS “Dirty Dozen” list of tax scams for the 2018 filing season.

During filing season, the IRS generally sees a surge in scam phone calls threatening such things as arrest, deportation and license revocation if the victim doesn’t pay a bogus tax bill. In a new twist being seen in recent weeks, identity thieves file fraudulent tax returns with refunds going into the real taxpayer’s bank account – followed by a phone call trying to con the taxpayer to send the money to the scammer.

The Dirty Dozen is compiled annually by the IRS and lists a variety of common scams taxpayers may encounter any time during the year.

To help protect taxpayers, the IRS is highlighting each of these scams on 12 consecutive days to help raise awareness. The IRS also urges taxpayers to help protect themselves against identity theft by reviewing safety tips prepared the Security Summit, a collaborative effort between the IRS, states and the private-sector tax community.

How Do the Scams Work?

Con artists make unsolicited calls claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They convince the victim to send cash, usually through a wire transfer or a prepaid debit card or gift card. They may also leave “urgent” callback requests through phone “robo-calls,” or send a phishing email.

Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the driver’s license of their victim if they don’t get the money.

Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. The callers use IRS employee titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.

The IRS also reminded taxpayers today that scammers change tactics. Aggressive and threatening phone calls by criminals impersonating IRS agents remain a major threat to taxpayers, but variations of the IRS impersonation scam continue year-round and they tend to peak when scammers find prime opportunities to strike.

The Treasury Inspector General for Tax Administration (TIGTA) reports they have become aware of over 12,716 victims who have collectively paid over $63 million as a result of phone scams since October 2013.

Here are some things the scammers often do, but the IRS will not do. Taxpayers should remember that any one of these is a tell-tale sign of a scam.

The IRS Will Never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving taxpayers the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.
  • Call you about an unexpected refund.

For Taxpayers Who Don’t Owe Taxes or Don’t Think They Do:

For Those Who Owe Taxes or Think They Do:

Stay alert to scams that use the IRS as a lure. Tax scams can happen any time of year, not just at tax time. For more information visit Tax Scams and Consumer Alerts on IRS.gov.

Taxpayers have a set of fundamental rights they should be aware of when dealing with the IRS. These are the Taxpayer Bill of Rights. Explore these rights and the agency’s obligations to protect them on IRS.gov.

The 2018 Tax Reform Act

After months of discussion and back-and-forth between the House and Senate, we finally have a Tax Bill, which takes effect January 1, 2018. (NOTE: As of this time, the states DO NOT conform to this Tax Reform bill, so you will need to make adjustments between your federal and state returns) Here is a quick summary, along with some of my tax tips:

  1. Tax Brackets and Tax Rates: Both have been reduced across the board. There are 7 tax rates, ranging from 10% to 37%, with the highest brackets going to single taxpayers’ taxable income of over $500K and Married taxpayers over $600K.
  2. Alternative Minimum Tax (AMT): Exemption amounts have been increased to $70,300 (Single) and $109,400 (Married filing jointly), with the phaseout thresholds increased to $500K (Single) and $1 million (Married).
  3. Estate Tax Exemption: Doubled to $11,200,000.
  4. Standard Deduction: Almost doubled in 2018, to $24K (married jointly), $18K (Head of Household), $12K (Single). It’s increased by $1,600 if over 65, blind or disabled. TIP: If this increase will eliminate the need to Itemize your deductions in 2018, you may want to prepay such items, like Charity, property taxes, etc., in 2017, so that you can maximize your deductions.
  5. Personal and Dependent Exemptions: Eliminated
  6. Child Tax Credit: Will double to $2,000 per qualifying child under 17 years of age. Plus, the phaseout more than doubles to adjusted gross incomes of more than $400K (Married) and $200K (Single). That means many more taxpayers will benefit from this credit. For other dependents who are not qualifying children, the credit is $500.
  7. Student Loan Interest Deduction: Basically unchanged.
  8. Education Credit: No change, but you will still need a Form 1098-T to claim it.
  9. Section 529 Education Plans: Up to $10K distribution per beneficiary can be used for tuition for public, private elementary, secondary school.
  10. Student Loan Cancellation of Debt: If the cancellation is due to death or disability, the income is excluded.
  11. Teacher Expenses: Still has the above-line $250 deduction (indexed for inflation). See my tips below if you incur expenses greater than the $250.
  12. Moving Expenses: Eliminated, except in the case of a member of the Armed Forces moving pursuant to a military order. Tip: You may want to negotiate getting these reimbursed by the new employer.
  13. Alimony: Beginning with new divorces in 2019, such payments are no longer deductible and not taxable to the recipient.
  14. Itemized Deductions: Where there is discussion and confusion:
    1. State and Local taxes (i.e., state income tax and property taxes and DMV license fees): Can deduct up to $10K beginning 2018. Tip: pay your second property tax installment now, as well as your Jan 15, 2018 estimate state income tax installment.
    2. Foreign Real Property Taxes are no longer deductible.
    3. Medical Expenses exceeding 7.5% are deductible. In 2019, that goes to 10%. Tip: If you have a high-deductible health plan, consider getting a Health Savings Account (HSA). Contributions (to certain limits) are fully deductible and reduce your adjusted gross income, and you can take distributions to pay unreimbursed medical costs.
    4. Charitable Contributions: Continue to be deductible, with the 50% of income limitation now increased to 60%.
    5. Mortgage Interest on both a first and second home are deductible, with the debt cap at $750K of debt. The $1 million cap is grandfathered for loans prior to Dec 15, 2017. However, Home Equity Loans or HELOCs are not deductible, unless used to purchase or improve rental property. (Note: I’m waiting for clarification on if there is any grandfathering on this)
    6. Casualty Losses: Not deductible unless due to a federal disaster. Tip: Always check on http://www.irs.gov for a list of what they are deeming disaster areas.
    7. Gambling Losses: Only deductible to the extent of the income, but you can now include other expenses incurred in the gambling income, such as travel expenses to/from the casino. Tip: Track your expenses and keep receipts.
    8. Employee Business Expenses: Eliminated beginning 2018. Tip: If your job entails out-of-pocket expenses, you may want to negotiate being reimbursed for your out-of-pocket expenses. Since your employer will get a tax cut with this plan, as well as still be able to deduct these reimbursements, I would think that there would be more of those negotiations. Tip for teachers: Unreimbursed classroom supplies (exceeding the $250), like crayons, Kleenex, pencils, etc. can be separated out and deducted as Charitable Contributions (which will continue to be deductible after 2017) as long as you get a donation acknowledgment from your school. Now is the time to set this up with your school!
    9. All Misc. Itemized Deductions subject to the 2% floor eliminated.
  15. Affordable Care Act: The individual mandate is repealed beginning 2019.
  16. Corporations: The highest tax rate for corporations is reduced to 21% beginning 2018.
  17. Pass-Through Companies: This includes S Corporations, Partnerships, Trusts/estates and sole proprietorships, which are allowed to deduct 20% of business-related income as a deduction to reduce taxable income. It doesn’t reduce income subject to Self-Employment tax, and there are some restrictions for service businesses. This deduction phases out for joint filers with income between $315K-$415K.
  18. Domestic Production Activities Deduction (DPAD): Repealed beginning 2018.
  19. Like-Kind Exchanges: : Limited to Real property.
  20. Net Operating Losses: The 2-year Carryback is repealed except in the farming business.
  21. Section 179 Expensing: Increased to $1 million. The $25K SUV limitation stays the same. The definition of qualified real property eligible for this Section 179 expensing has been expanded to include roofs, heating and A/C, security systems.
  22. Bonus Depreciation: Now available to used property as well as new.
  23. Vehicle Depreciation: The cap placed on depreciation write-offs for business vehicles is increased.
  24. Entertainment Expenses: While business meals continue to be 50% deductible, no deduction is allowed for activities generally considered to be entertainment or recreation. This also includes membership dues. In addition, the 100% meals deduction for employer-provided meals for employer’s convenience is now reduced to 50%.
  25. If you have employees and provide paid family and medical leave, you get a credit of 12.5% of wages paid to qualifying employees.

I will be posting more information as it comes, but now is a good time to meet with your tax professional and lay out some strategies for 2018 and beyond!