Tax Reform Special Report

On Friday, December 15, 2017, the House and Senate conferees signed off on a consolidated tax bill resolving the two versions of the “Tax Cuts and Jobs Act of 2017”. Votes on this final bill are expected in the House and Senate this week. We have outlined the differences between current law and the conference report.

TAX CUTS AND JOBS ACT OF 2017

This table compares the predominate changes made by the “Tax Cuts and Jobs Act of 2017” to the tax law as it was during 2017 for individuals and small businesses.

2017

Tax Cuts & Jobs Act (2018)

Exemptions
$4,050 Suspended through 2025 (effectively repealed)
Standard Deductions
Single: $6,350 Head of household: $9,350 Married filing joint: $12,700 Add’l Elderly & Blind Joint & Surviving Spouse: $1,250 Others: $1,550 Single: $12,000 Head of household: $18,000 Married filing joint: $ 24,000 Add’l Elderly & Blind Joint & Surviving Spouse: $1,300 Others: $1,600
Itemized Deductions
Medical – Allowed in excess of 10% of AGI Retained for 2017 and 2018 with an AGI threshold of 7.5% regardless of age. Threshold increases to 10% after 2018. 7.5% threshold also applies for AMT purposes for ’17 and ’18.
TaxesProperty taxes, and state and local income taxes are deductible. Taxpayers can elect to deduct sales tax in lieu of state income tax. The deduction for taxes is retained but capped at $10,000 for the year. Foreign real property taxes may not be included. The Act prohibits claiming a 2017 itemized deduction on a pre-payment of income tax for 2018 or other future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.
Home Mortgage InterestAllows interest on $1M of acquisition debt on primary and second home and interest on $100K of home equity debt. Allows interest on $750K of acquisition debt on primary and secondary home. Grandfathers interest on up to $1M of acquisition debt for loans prior to 12/15/2017. Repeals the deduction for home equity debt.
Charitable Contributions – Allows charitable contributions generally not exceeding 50% of a taxpayer’s AGI. Continues to allow charitable contributions and increases the 50% of AGI to 60%. Bans charitable deduction for payments made in exchange for college athletic event seating rights. Also repeals certain substantiation exceptions.
Gambling Losses Allows a deduction for gambling losses not exceeding gambling income. Continues to allow a deduction for gambling losses not to exceed the gambling income. Clarifies that “gambling losses” includes any deduction otherwise allowable in carrying on any wagering transaction.
Personal Casualty & Theft Losses – Casualty and theft losses are allowed to the extent each loss exceeds $100 and the sum of all losses for the year exceeds 10% of the taxpayer’s AGI. Suspends personal casualty losses through 2025, except for casualty losses attributable to a disaster declared by the President under Sec 401 of the Robert T Stafford Disaster Relief and Emergency Assistance Act.
Tier 2 Miscellaneous – Includes deductions for employee business expenses, tax preparation fees, investment expenses and certain casualty losses. Suspends all tier 2 (those subject to the 2% of AGI threshold) itemized deductions through 2025.
Phase-out of Itemized DeductionsItemized deductions are phased out for higher income taxpayers. The phase-out is suspended through 2025.
Above-The-Line Deductions
Teachers’ Deduction – Allowed up to $250 (indexed) for classroom supplies and professional development courses. Continues to allow this deduction.
Moving Deduction & Reimbursements – Allows a deduction for moving expenses for a job related move where the commute is 50 miles further and the individual is employed for a certain length of time. Qualified moving expense reimbursements are excluded from the employee’s gross income. Deduction is suspended through 2025 except for military change of station. Employer (other than military) reimbursement would be included as taxable wages.
Alimony – Allows the payer of alimony to claim an above-the-line deduction for qualified payments; recipient reports the income. For divorce agreements entered into after December 31, 2018 or existing agreements modified after that date that specifically include this amendment in the modification, alimony would no longer be deductible by the payer and would not be income to the recipient.
Performing Artists Expenses – An employee with an AGI of $16,000 or less who receives $200 or more from each of two or more employers in the performing arts field can deduct their performing arts expenses that exceed 10% of AGI as an above-the-line deduction. Retained – The House Bill would have repealed this deduction but the conference agreement retains it in its current form.
Government Officials’ Expenses – An official who is paid on a fee basis as an employee of a state or local government and who pays or incurs expenses with respect to that employment may claim the expenses as a deduction in calculating AGI. Retained – The House Bill would have repealed this deduction but the conference agreement retains it in its current form.
Employee Fringe Benefits
Bicycle CommutingAllows reimbursement of $20 per month as tax-free compensation Suspended through 2025
Employer Provided Housing – Allows an exclusion from income for the costs of housing provided an employee for the convenience of the employer Retained – The House Bill would have limited the excludable amount, but the conference agreement retains the exclusion in its current form.
Dependent Care Assistance – Allows an exclusion from gross income of up to $5,000 per year for employer provided dependent care assistance. Retained – The House Bill would have repealed the excludable amount, but the conference agreement retains the exclusion in its current form.
Adoption Assistance – An employee can exclude a maximum of $13,570 (2017) for qualified adoption expenses paid or reimbursed by an employer. The exclusion is phased out for higher-income taxpayers. Retained – The House Bill would have repealed the exclusion, but the conference agreement retains the exclusion in its current form.
Tax Rates
There are seven tax brackets: 10, 15, 25, 28, 33, 35 and 39.6%. There will continue to be seven tax brackets but at different rates and thresholds. The rates are: 10, 12, 22, 24, 32, 35 and 37%
Identifying Shares Sold
Under current law a taxpayer who disposes of part of his shares in a corporation that were acquired at different times or for different prices is allowed to choose which shares are considered sold if they are adequately identified. The Senate version of the bill would have required using the first-in first-out (FIFO) method of selection for which shares were sold. However, the final bill does not include that requirement.
Child Tax Credit
Allows a credit of $1,000 per qualified child under the age of 17. The credit is reduced by $50 for each $1,000 the taxpayer’s modified gross income exceeds $75K for single taxpayers, $110K for married taxpayers filing joint and $55K for married taxpayers filing separate. Taxpayers are eligible for a refundable credit equal to 15% of earned income in excess of $3,000. There is also a special refundable computation when there are 3 or more qualifying children. Retains the “under age 17” requirement and increases the child tax credit to $2,000, with up to $1,400 being refundable per qualified child. The credit phases out for taxpayers with AGI over $200,000 ($400,000 if married joint). Thresholds are not inflation-indexed. Child must have a valid Social Security Number that is issued before the due date of the return to qualify for this credit.
Non-child Dependent Credit
No such provision Allows a $500 non-refundable credit for non-child dependents. Same phaseout rule as for Child Tax Credit.
Alternative Minimum Tax (AMT)
Individuals – 2017 Exemption amounts are $84,500 for married taxpayers filing jointly, $42,250 for married filing separate, and $54,300 for single and head of household. The exemption phase-out thresholds are: $160,900 for married taxpayers filing jointly, $80,450 for married filing separate, and $120,700 for single and head of household. Retained, but the exemption amounts are increased to: $109,400 for married taxpayers filing jointly, $54,700 for married filing separate, and $70,300 for single and head of household. The exemption phase-out thresholds are increased to: $1 Million for married taxpayers filing jointly and $500K for others.
Corporate Repealed
Education Provisions
American Opportunity Credit (AOTC) –The AOTC provides a post-secondary education tax credit of up to $2,500 per year, per student for up to four years. 40% of the credit is refundable. The credit has a phase-out threshold of $160K for MFJ filers (no credit allowed for MFS) and $80K for others. Retained – The House Bill would have extended the credit to a fifth year, but the conference agreement retained the credit in its current form.
Lifetime Learning Credit (LLC) –LLC provides annual credit of up to $2,000 per family for post-secondary education. The credit has a phase-out threshold of $112K for MFJ filers (no credit allowed for MFS) and $56K for others. Retained – The House Bill would have repealed the LLC, but the conference agreement retains the credit in its current form.
Coverdell Education Accounts – An annual non-deductible contribution of up to $2,000 is permitted and with tax-free accumulation if distributions are used for grammar school and above education expenses. Retained – The House Bill would have barred any further contributions to Coverdells, but allowed a rollover to a Sec 529 plan. However, the conference agreement retains Coverdell accounts in their current form.
Sec 529 Plans – These accounts allow non-deductible contribution and provide for tax-free accumulation if distributions are used for post-secondary education expenses. Amended to allow tax-free distributions of up to $10K per year for grammar and high school education tuition and expenses.
Discharge of Student Loan Indebtedness– Excludes from income the discharge of debt where the discharge was contingent on the student working a specific period of time in certain professions and for certain employers. Modified to exclude income from the discharge of indebtedness due to death or permanent disability of the student.
Higher Education Interest – Allows an interest deduction of up to $2,500 for interest paid on post-secondary education loans. Retained – The House Bill would have repealed the higher education interest deduction, but the conference agreement retains the deduction in its current form.
Tuition Deduction – Allows an above-the-line deduction for tuition and related expenses in years before 2017. The amount of the deduction is limited by AGI and the maximum deduction for any year is $4,000. Retained – The House Bill would have repealed the tuition deduction, but the conference agreement retains the deduction in its current form. This means that the termination date of December 31, 2016 still applies, so this deduction would not be allowed for 2017 and later.
Employer Provided Education Assistance – An employer is permitted to provide tax-free employee fringe benefits up to $5,250 per year for an employee’s education. Retained – The House Bill would have repealed employer provided education assistance, but the conference agreement retains the assistance in its current form.
Exclusion of Qualified Tuition Reduction – Employees of educational institutions, their spouses and dependents may receive a nontaxable benefit of reduced tuition. Retained – The House Bill would have repealed the exclusion from income of tuition reductions, but the conference agreement retains the benefit in its current form.
Exclusion for Interest on U.S. Savings Bonds used for Higher Education Expenses – Interest earned on a qualified United States Series EE savings bond issued after 1989 is excludable from gross income to the extent the proceeds of the bond upon redemption are used to pay for higher education expenses. The exclusion is phased out for higher income taxpayers. Retained – The House Bill would have repealed the exclusion from income of U.S. savings bond interest used for higher education expenses, but the conference agreement retains the benefit in its current form.
Sec 529 – Able Account Rollovers Distributions after 2017 from 529 plans would be allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of the designated beneficiary’s family.
Home Sale Exclusion
Generally, where a taxpayer owns and uses a home as his principal residence for 2 out of the 5 years prior to its sale, the taxpayer can exclude up to $250,000 ($500,000 for a married couple) of profit from the sale. Both the Senate and House bills would have changed the qualifying period to 5 out of 8 years, and the House bill would have phased the exclusion out for higher income taxpayers. The conference agreement retains the current law.
Roth Conversion Recharacterizations
Permits, within certain time limits, a Traditional to Roth IRA conversion to be undone. Once a traditional IRA is converted to a Roth IRA, it cannot be undone. However, recharacterization is still permitted with respect to other contributions. For example, before a return’s due date a contribution for the year to a Roth IRA can be recharacterized as a contribution to a traditional IRA.
Estate & Gift Taxes
$5.49 Million (2017) is exempt from gift and/or estate tax. This is in addition to the annual gift tax exclusion, which for 2017 is $14,000 per gift recipient. The exclusion is increased to $10 Million adjusted for inflation since 2011, which is estimated to be approximately $11.2 Million. The annual gift tax exclusion is retained. The House Bill would have repealed the estate tax for decedents dying in 2025 or later, but the conference agreement did not include this provision.
Entertainment Expenses
A taxpayer who can establish that entertainment expenses or meals are directly related to (or associated with) the active conduct of its trade or business, generally may deduct 50% of the expense. No deduction is allowed for (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with items (1) and (2). Also disallows a deduction for expenses associated with providing any qualified transportation fringe to the taxpayer’s employees. Employers may still deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).
Tax Credits
Electric Vehicle CreditProvides a non-refundable credit of up to $7,500 for the purchase of a qualified electric vehicle. Retained – the House Bill originally repealed this credit, but the credit is retained in the conference agreement.
Adoption Credit– Provides a credit of up to $13,570 for child under the age of 18 or a person physically or mentally incapable of self care. Retained – the House Bill originally repealed this credit, but the credit is retained in the conference agreement.
Sec 1031 Exchange
There is non-recognition of gain when taxpayers trade properties of like-kind that are used for business or investment. For exchanges completed after December 31, 2017, only real property will qualify for Sec 1031 treatment.
Real Estate Recovery Periods
Currently real property has a MACRS recovery period of 39 years for commercial property and 27.5 years for residential rental property. The Senate version would have shortened the recovery period for real property. However, the conference agreement retains the 27.5 and 39-year recovery periods.
Net Operating Loss (NOL) Deduction
Generally a NOL may be carried back 2 years and any remaining balance is then carried forward until used up or a maximum of 20 years unless the taxpayer elects to forego the carryback and carry the loss forward only. The 2-year carryback provision is generally repealed after 2017 except for certain farm losses. Beginning after December 31, 2017, the NOL deduction is limited to 80% of taxable income (determined without regard to the NOL deduction) for losses arising in taxable years beginning after December 31, 2017.
Sec 179 Expensing
A taxpayer can elect to expense up to $510,000 of tangible business property, off the shelf software and certain qualified real property (generally leasehold improvements). The annual limit is reduced by $1 for every $1 over a $2,030,000 investment limit. The Sec 179 deduction for certain sport utility vehicles is capped at $25,000. For property placed in service after 2017: The annual expensing and investment threshold limits are increased to $1,000,000 and $2,500,000, respectively, with both subject to inflation indexing. SUV cap to be inflation-adjusted. Definition of Sec 179 property expanded to include certain depreciable tangible personal property – e.g., beds and other furniture, refrigerators, ranges, and other equipment used in the living quarters of a lodging facility such as an apartment house, dormitory, or any other facility (or part of a facility) used predominantly to furnish lodging or in connection with furnishing lodging. Expands the definition of qualified real property eligible for Sec 179 expensing to include any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
Unlimited Expensing
For 2017 current law allows 50% of the cost of eligible new property to be deducted with the balance of the cost depreciable. This is commonly termed “bonus” depreciation. The bonus rate is scheduled to decline to 40% for 2018, 30% for 2019 and 0% thereafter. Allows 100% unlimited expensing of tangible business assets (except structures) acquired after September 27, 2017 and through 2022. Applies when a taxpayer first uses the asset (does not need to be new).
“Luxury Auto” Depreciation Limit
Annual limits apply to passenger autos used for business on which depreciation is claimed. For vehicles placed in service in 2017 the limits are $3,160, $5,100, $3,050 and $1,875, respectively, for years 1, 2, 3, and 4 and later. If bonus depreciation is claimed, the first-year limitation is increased by an additional $8,000. For passenger autos placed in service after 2017 the maximum amount of allowable depreciation is increased to the following amounts if bonus depreciation is not claimed: $10,000 for the placed-in-service year, $16,000 for the 2nd year, $9,600 for the 3rd year, and $5,760 for the 4th and later years. Amounts will be indexed for inflation after 2018.
Listed Property
To claim a business deduction for certain types of property, referred to as listed property, enhanced substantiation requirements must be followed and deductions are only allowed if business use of the property is more than 50%. Computers have been included in this category. Computers and peripheral equipment placed in service after 2017 have been removed from the definition of listed property.
Deduction For Pass-Through Income
No such provision. Taxpayers with pass-through income will be able to deduct 20% of domestic qualified business income from a partnership, S corporation, or sole proprietorship. However, the deduction ratably phases out for joint filer income between $315,000 and $415,000 (between $157,500 and $207,500 for others). This provision provides an alternate limitation based on wages and capital. The limitation is the greater of 50% of the wages paid or 25% of the wages paid plus 2.5% of the unadjusted basis of the business’ capital assets. The deduction applies only to compute income tax, i.e., reduces taxable income but not adjusted gross income. Does not reduce income subject to SE tax.
Excess Business Losses For Individuals
Losses, other than passive losses, were allowed, and if a net loss was the result, a NOL deduction was created and carried back 2 years and then forward 20 years until used up. A taxpayer other than a C corporation would not be allowed an “excess business loss.” Instead, the loss would be carried forward and treated as part of the taxpayer’s net operating loss (NOL) carryforward in subsequent taxable years. Excess business loss for a taxable year is defined in the Act as the excess of the taxpayer’s aggregate deductions attributable to the taxpayer’s trades or businesses for that year, over the sum of the taxpayer’s aggregate gross income or gain for the year plus a “threshold amount” of $500,000 for married individuals filing jointly, or $250,000 for other individuals. The provision will apply after taking into account the passive activity loss rules.
Domestic Production Deduction (Sec 199)
Sec 199 provides a deduction from taxable income (AGI in the case of an individual), equal to 9% of the lesser of the taxpayer’s qualified domestic production activities income or taxable income (determined without regard to the section 199 deduction) for the taxable year. The deduction is further limited to 50% of the W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts for the year. Repealed, effective 2018
ACA Individual Insurance Mandate
Anyone who does not meet one of the limited exemptions must have health insurance or pay a penalty. In the tax code this is referred to as the “shared responsibility payment.” The penalty is the greater of an inflation adjusted flat dollar amount or 2.5% of the taxpayer’s household income. For 2018 the flat dollar amount is $695 per adult and $347.50 per child but not more than $2,085 per family. Repealed, effective 2019.

QuickBooks Tip — Working with Downloaded Transactions in QuickBooks Online

Downloading transactions into QBO is the easy part. You still have work to do once they’re on board.

Its ability to download financial transactions is one of the five best things about QuickBooks Online. Without it, you’d spend a lot of time on tedious data entry, verifying which checks and deposits had cleared and entering new ones.

Instead, you can easily connect to your bank and bring in all your activity from the previous hours or day. QuickBooks Online stores this neatly in a register and provides tools for you to further describe and classify each transaction.

Setting Up the Connection
Haven’t connected your financial institution to QuickBooks Online yet? It’s easy. Click the Banking link in the toolbar, then Add Account in the upper right. The Find your bank window opens. Start entering the name of your bank, credit card company, or service like PayPal in the blank field. A list of potential matches will drop down; you simply select the one you want. A window like this will open:

All you need to do to start downloading transactions into QuickBooks Online is select your financial institution and enter the User ID and Password you use to connect directly to the site.

You will have to go through some security procedures, and then QuickBooks Online will download 90 days of transactions (you can shorten this if you’d like). You’ll also be asked which QBO account should receive the transactions. After a few minutes, the register for that account will appear, displaying the transactions you just downloaded.

Warning: The mechanics of connecting to your bank and downloading your first batch of transactions may sound easy, but if everything is not absolutely clear to you as you’re going through the process, please contact us sooner rather than later.

Working with Transactions
Once you’ve downloaded a set of transactions, you’ll want to look at them. Again, click the Banking link in the navigation toolbar. Your accounts will appear in small boxes at the top of the page, along with two balances: the one that came from the financial institution and the one in QuickBooks Online. Select the one you want by clicking on it, and its register will open.
Tip: QuickBooks Online generally updates your accounts once daily. If you want to launch a manual update at any time, click on Update in the upper right corner.

Let’s look at one downloaded transaction to see what you can do with it. Make sure the For Review column is highlighted above the register. Select a transaction by clicking on it. A window like this will open below it:

QuickBooks Online does more than simply download financial transactions: It lets you define them in greater detail.

There are several options here, including:

  • Add to register. If you’re satisfied with the information as is, just click the Add button to the right (not pictured here).
  • Split. If you want to split the amount/category (Supplies, Tools, etc.)/class of a transaction, click Split (also off to the right and not pictured). A window will open to let you specify that.
  • Assign categories. QuickBooks Online may automatically make assignments to obvious categories, which you can change if incorrect. You can also click the down arrow to the right of that field and select your own from the list.
  • Bill an expense to a customer. Did you purchase something that needs to be billed to a customer? Click in the box under Billable and select the correct one from the drop-down list that opens.
  • Find matches. This can get complicated, and we recommend you let us work with you on it. Let’s say you entered an invoice in QuickBooks Online, and an income item for that exact amount gets downloaded from your bank. QBO will assume that those two “match,” and display them in the In QuickBooks column. You can click Undo if this is incorrect. But you can also click Find match in the transaction window, and QBO will open a list of possibilities.

As you can see from browsing the lists of downloaded transactions, there’s a lot to learn here. We’d be happy to get together and walk you through your first explorations of these powerful features.

How to Save for a Child’s College Education

A frequently asked question is, “How might I save for a child’s college education?” The answer depends on how much the education is expected to cost and how much time is left until the child heads off to college or university.

The amount of funds that will be required will depend upon whether your child will be attending a local college, attending a local college and then transferring into a university, or going straight to the university. If attending college locally, you generally only need to be concerned about tuition, and the child can live at home, whereas attending a university, unless it is local, will add the cost of housing and food on top of substantially higher university tuition. Another factor is whether the student will leave school after obtaining a bachelor’s degree or will be doing graduate studies for an advanced degree.

When the time comes, your child may qualify for a scholarship or grant, but you can’t depend on that when working out a college savings plan.

The federal tax code has two beneficial savings plans that can be used. In both plans, there is no tax benefit to making any contributions. The benefit is that growth due to appreciation in investments, if any, and earnings (dividends and interest) are tax-free when withdrawn for qualified education expenses. Thus, the sooner the plan is started, the better, because it will have more years to grow in value.

More tax benefit is gained by front-loading the contributions and thus having a larger amount on which to compound the growth and earnings. You should also be aware that anyone, not just you, can make a contribution to the child’s college savings plans. So if your child has any well-heeled grandparents, other relatives or friends who would like to help, they can also contribute.

The two savings plans currently available for college savings are the Coverdell Education Savings Account and the Qualified Tuition Plan, most commonly referred to as a Sec. 529 Plan (529 denotes the section of the tax law code that governs it).

Coverdell Education Savings Account – This plan only allows up to $2,000 in contributions per year, and although it allows withdraws for kindergarten education and above, the contribution limitations generally rule it out as a practical method for college savings.

Sec 529 Plan – This approach is likely your best option. State-run Sec. 529 plan benefits are limited to postsecondary education, but they allow significantly larger amounts to be contributed; multiple people can each contribute up to the gift tax limit each year without being subjected to gift tax reporting. This limit is $14,000 for 2017, and it is periodically adjusted for inflation; in 2018, it increases to $15,000. A special rule allows contributors to make up to five years of contributions in advance (for a total of $70,000 in 2017).

Sec. 529 plans allow taxpayers to put away larger amounts of money, limited only by the contributor’s gift tax concerns and the contribution limits of the intended plan. There are no limits on the number of contributors, and there are no income or age limitations. The maximum amount that can be contributed per beneficiary (the intended student) is based on the projected cost of college education and will vary between the states’ plans. Some states base their maximum on an in-state four-year education, but others use the cost of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000, with some topping $370,000. Generally, additional contributions cannot be made once an account reaches that level, but that doesn’t prevent the account from continuing to grow.

When the time comes for college, the distributions will be part earnings/growth in value and part contributions. The contribution part is never taxable, and the earnings part is tax free if used to pay for qualified college expenses. In addition, the portion of the distribution that represents the return on the contributions and is used for qualified education expenses qualifies for the American Opportunity Tax Credit, which can be as much as $2,500, provided your income level does not phase it out.

For additional details or assistance in planning for a child’s higher education, please give us a call.

Gambling — Income Tax Conundrum

Gambling is a recreational activity for many taxpayers, and as one might expect, the government gets a cut if you win. In fact, there are far more issues related to gambling than you might imagine, and they may be impacting your taxes more than you know. So here is a rundown on the many issues that can affect you. Gambling takes many forms – horse racing, lotto tickets and scratchers, casino games, etc. – but they are all subject to taxation rules.

Reporting Winnings – Many individuals believe that they only have to report the winnings for which they receive a Form W2-G. Unfortunately, the IRS has a different viewpoint. Although you may be able to offset your reported gains with gambling losses, the IRS anticipates that you will also have had gambling winnings that were under the W2-G reporting threshold and will raise this issue during an audit.

Gambling Losses – The good news is that you can deduct gambling losses if you itemize your deductions, but only to the extent of your gambling income. In other words, you can’t have a net gambling loss on your tax return. Bad news: if you don’t itemize your deductions, you will have to pay taxes on the entire winnings even if you have a net gambling loss, as is the case for most individuals.

Documenting Losses – The next logical question is: how are you going to document your gambling losses if audited? Don’t rush down to the track and start collecting discarded tickets, since they generally aren’t acceptable documentation because of their ready availability. The IRS has published guidelines on acceptable documentation to verify losses. They indicate that an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, this diary should contain at least the following information:

(1) The date and the type of specific wager or wagering activity,
(2) The name of the gambling establishment,
(3) The address or location of the gambling establishment,
(4) The names of other persons (if any) present with taxpayer at the gambling establishment, and
(5) The amounts won or lost.

Save all available documentation, including items such as losing lottery and keno tickets, checks, and casino credit slips. You should also save any related documentation such as hotel bills, plane tickets, entry tickets, and other items that would document your presence at a gambling location. If you are a member of a slot club, the casino may be able to provide a record of your electronic play. You might also obtain affidavits from responsible gambling officials at the gambling facility. With regard to specific wagering transactions, your winnings and losses might be further supported by:

  • Keno – Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment.
  • Slot Machines – A record of all winnings by date and time that each machine was played.
  • Table Games – The number of the table at which the taxpayer was playing as well as casino credit card data indicating whether credit was issued in the pit or at the cashier’s cage.
  • Bingo – A record of the number of games played, the cost of tickets purchased, and the amounts collected on winning tickets.
  • Racing – A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.
  • Lotteries – A record of ticket purchase dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winning statements.

Online Gambling – If you gamble online, there is a good chance that the account is with a casino operating out of a foreign country. In this case, you should be aware that all U.S. citizens and resident aliens with a financial interest in or signature authority over foreign accounts with an aggregate balance of over $10,000 any time during the prior calendar year must complete FinCEN Form 114 online reporting those accounts to the Treasury by April 15th of the subsequent year or face draconian penalties (a six-month extension is available).

Other Tax Side Effects of Gambling – Because gambling income is reported in full as income and the losses are an itemized deduction, gambling winnings increase a taxpayer’s adjusted gross income (AGI) for the year. An individual’s AGI is used to limit other tax benefits, and having gambling income can have an adverse impact on your taxes. For instance, when you itemize your deductions, your medical expenses are currently reduced by 10% of your AGI. If you are receiving Social Security benefits, those benefits can become more taxable when gambling winnings are included in your AGI. The same applies to the cost of your Medicare insurance premiums, which are based on your AGI from two years prior.

Another very noticeable side effect is the cost of a family’s health insurance through a government marketplace. Under the Affordable Care Act, lower-income individuals receive a tax credit that reduces the cost of their insurance. However, their AGI is used to determine the amount of their credit – the higher their income, the lower the credit, and the lower the credit, the higher their insurance premiums.

If you generally claim the dependent exemption for a qualified relative – say, your mother – and Mom happens to hit a jackpot at the local casino, you may end up being unable to claim her exemption for the year of the winnings if the gambling winnings pushed Mom’s income over the annual gross income limit for claiming her exemption, which for 2017 is $4,050.

If you have questions about how these issues will affect your specific tax situation, please give us a call.

Employee vs. Independent Contractor — Tips for Business Owners

If you are a small business owner, whether you hire people as independent contractors or employees will impact the amount of taxes you withhold from their paychecks as well as how much and what types of taxes you pay. Furthermore, it will affect how much additional cost your business must bear, what documents and information must be provided to you, and what tax documents must be given to the individuals you are hiring.

Worker misclassification is a perennial issue for the Internal Revenue Service and state taxing authorities due to the perception that many employers are not properly classifying their workers.

The obvious advantage for a business to treat an individual as an independent contractor is to avoid paying minimum wages, overtime, payroll taxes, worker’s compensation insurance, unemployment tax, Social Security contributions, health benefits, paid leave, 401(k) benefits, and unpaid leave under the Federal Family and Medical Leave Act. Workers also have some tax-related benefits to being considered independent contractors, such as the ability to deduct certain business expenses that are not available to employees, the eligibility to set up their own retirement plans, and the fact that they are not subject to withholding. Of course, many workers want to be considered employees so they can get the benefits due to employees, such as vacation pay, overtime pay, and health insurance.

Here are some things every business owner should know about hiring people as independent contractors versus hiring them as employees.

Three characteristics are used by the IRS to determine the relationship between businesses and workers:

  1. Behavioral Control – Behavioral control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.
  2. Financial Control – Financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
  3. Type of Relationship – This type of relationship factor relates to how the workers and the business owner perceive their relationship.

If you have the right to not only control or direct what is to be done but also how it is to be done, then your workers are most likely employees.

If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and not filing the required tax forms. Employers can request the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. A worker may also file Form SS-8 requesting an IRS determination. The IRS does not issue determinations for proposed or hypothetical situations.

If you need more information about the critical determination of a worker’s status as an independent contractor or employee, please give us a call.