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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.”

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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.

Tax Tip For People With Disabilities

Taxpayers with disabilities or parents of children with disabilities may qualify for the Earned Income Tax Credit (EITC). The EITC could put an extra $2 or up to $6,269 into a taxpayer’s pocket. Nevertheless, the IRS estimates that as many as 1.5 million people with disabilities miss out on this valuable credit because they fail to file a tax return (their income may fall under the threshold). Many of these taxpayers may be concerned that the EITC would count as income and impact their ability to get government benefits, but that is not the case.

Get Ready For Tax Season

It’s almost that time already. 2016 is behind us, and now the document-gathering begins. By the end of this month, you should start receiving your various year-end tax documents (1099s, W-2s, 1098s, etc.). If the envelope says “Important Tax Documents,” do NOT throw it out (you’d be surprised that people still do…)!  A few things to note about this filing season:

  1. The IRS doesn’t start accepting returns until at least January 23. Just because they’re delayed doesn’t mean that you should delay in getting your documents in order. Use this time to continue looking for possible deductions, receipts, etc.
  2. If your refund includes tax credits via the Earned Income Tax Credit or Additional Child Tax Credit, the IRS won’t even begin issuing those refunds until at least the middle of February. That is to allow time for additional due diligence and ID verification, as those items are both hotbeds for fraud. If you’re counting on those refunds, make sure you budget accordingly. Some tax preparation services will issue “Refund Anticipation Loans” or RALs, but there are fees involved.
  3. If you deduct your vehicle expenses, make sure you have a mileage log to back up your deduction. The IRS can and will disallow your deduction without a log.
  4. If you paid labor or rents of $600 or more in 2016 and plan to deduct them as expenses, make sure you issue the recipient a From 1099 no later than January 31, 2017. Failure to do so will result in penalties and disallowance of your deduction.
  5. If you’re deducting Travel and Entertainment expenses, make sure you have documentation of the business nature of the trip.

Year-End Tax Tip For Teachers

Year-end Tax Tip for teachers: I’ve posted this tip before, but it’s important enough to re-post, if you’re a teacher, OR know someone who is a teacher: Start gathering your documentation for all of your out-of-pocket classroom supplies! Unreimbursed employee expenses (such as classes for your credentials, dues, etc) are tax deductible as employee business expenses, which, except for the first $250 (which is deducted on the 1040), have to exceed 2% of your adjusted gross income to even be deducted. Here’s the tip: Unreimbursed classroom supplies, like crayons, Kleenex, pencils, etc. can be separated out and deducted as Charitable Contributions (which are NOT subject to the 2% floor) as long as you get a donation acknowledgment from your school.

Year-End Tax Tips From The Big Bear Tax Lady

With 2016 almost behind us, now is the time to think about what you can do to reduce your tax bite:

If you (or someone you know) is 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. While the donation isn’t deductible, many taxpayers in that demographic don’t itemize, so it’s more advantageous to get the tax benefit by donating straight from the IRA.

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.

Any donation you make to a qualified charity before December 31, 2016 (includes cash, check OR credit card) will be deductible on your 2016 tax return. If you donate $250 or more to an individual charity, make sure you receive an acknowledgment letter or statement from the organization.

Think about donating appreciated assets (such as stocks, mutual funds, real estate, etc.) to charity instead of cash before the end of 2016. You can deduct the Fair Market Value of the asset AND not have to pay Capital Gains tax.

If you have an Individual Retirement Account (IRA), you have until April 17, 2017 to contribute up to $5,500 ($6,500 if you’re age 50 or older) and have it count for tax year 2016.

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 $3,350 ($6,750 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.

If you’re self-employed and need more business deductions for 2016, 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, 2016 by either cash or credit card, you can deduct them in 2016.

Tax Tip for teachers: Start gathering your documentation for all of your out-of-pocket classroom supplies! Unreimbursed employee expenses (such as classes for your credentials, dues, etc) are tax deductible as employee business expenses, which, except for the first $250 (which is deducted on the 1040), have to exceed 2% of your adjusted gross income to even be deducted. Here’s the tip: Unreimbursed classroom supplies, like crayons, Kleenex, pencils, etc. can be separated out and deducted as Charitable Contributions (which are NOT subject to the 2% floor) as long as you get a donation acknowledgment from your school.