Should I Use a Credit Card to Pay My Taxes?

With tax filing season out of the way, paying off those tax bills that weren’t paid by April 18th is the next major concern for people. While there are a few options for payment agreements if you can’t afford to write a check for the full amount immediately, there’s also the option of paying your tax bill with a credit card. It can be less confusing than navigating IRS payment plans, and if your credit card has a nice rewards program, then it’s something to think about.

Depending on how much you owe in taxes and what terms your credit card offers, it may or may not be worth putting your tax bill on your credit card. Here are some of the pros and cons of using a credit card to pay your taxes and why you would or wouldn’t want to pursue this option.

Processing Fees

Legally, the IRS cannot directly accept credit card payments so they use three different approved payment processors for taking credit and debit card payments. At the time of writing, the processor with the most favorable rate is pay1040.com. Their minimum processing fee is $2.59, otherwise charging 1.87% of your balance. So, if you owe $2,000 in taxes, then you’d be charged a total of $2,037.40.

Keep in mind that this processing fee is steeper the bigger that your outstanding balance is, and you need to pay it on top of whatever you’ll owe in interest. If you go on a payment plan and pay by direct debit or check, you’ll only pay the IRS interest rate and any applicable penalties with no processing fees.

Interest Rates and Balance Transfers

Interest rate varies by the credit card that you have, but the average rate is 15.07%. For the first quarter of 2018, the IRS interest rate on underpayments is 4% (expected to go up to 5% for the second quarter.) This interest rate is in addition to any applicable penalties like the .0.50% late fee that applies every month until the balance has been paid off. But the interest rate the IRS charges is a lot less than the average credit card interest rate.

If you anticipate paying your balance off over time, you will definitely pay a lot more interest with a credit card even if it’s less confusing to calculate than the IRS interest rates, which change more often. However, if you open a new credit card intended for balance transfer if your credit’s good, then you can get a few months to a whole year to pay off your balance at a 0% interest rate which both buys time and saves money. But if you’re late on the payments eventually and/or your credit isn’t that great, this isn’t a likely option.

Credit Card Rewards

Credit card rewards, like cash rebates and frequent flier miles, are what often makes the extra fees and interest tempting to put your tax balance on your credit card: Why not get a free vacation for paying your taxes?

But financial experts estimate that most credit card rewards only net you about 1% back of what you purchase. It’s worth sitting down and doing the math on how much the IRS interest rates and forgoing processing fees would save you so you can take that vacation out of pocket instead. Unless you plan on paying off your entire balance immediately and the reward offered is worth what you’ll pay in fees, reward programs aren’t likely to completely defray the costs of using a credit card for your taxes.

Tax Bills and Your Credit Report

Ultimately, if you need extra time to pay your taxes, you are better off with an IRS installment or short-term payment agreement since owing money on these plans does not appear on your credit report. However, carrying a balance will appear once you shift the responsibility from the IRS to your credit card company. In addition to impacting your available credit, it also affects your credit utilization score based on how much of your available credit is being used.

If you’re looking for housing, more credit, or other situations that warrant your credit report being pulled, then you’ll want to avoid paying your taxes with a credit card.

Ultimately, it’s up to you to weigh the risks and benefits of using a credit card to pay your taxes. If you’re taking a longer-term approach, an installment agreement is likely to cost you less both upfront and in the long run. If you have any questions related to the pros and cons of using a credit card to pay your taxes, please give us a call.

Checking Your Federal Refund Status Is Easy

If you have already filed your federal tax return and are due to receive a refund, you can check the status of your refund online.

Where’s My Refund? is an interactive tool on the IRS website. Regardless of whether you have split your refund among several accounts, opted for a direct deposit into one account, or asked the IRS to mail you a check, Where’s My Refund? will give you online access to your refund information 24 hours a day and 7 days a week.

If you e-file, you can use this tool to get your refund information 24 hours after the IRS acknowledges receipt of your return. Nine out of 10 taxpayers typically receive refunds in fewer than 21 days when they use e-file with direct deposit. If you file a paper return, refund information will be available starting four weeks after mailing your return. When you go to check the status of your refund, have a copy of your federal tax return handy. To access your personalized refund information, you must enter

  • your Social Security Number (or Individual Taxpayer Identification Number);
  • your filing status (single, married filing jointly, married filing separately, head of household, or qualifying widow(er)), and
  • the exact refund amount shown on your tax return.

Once you have entered your personal information, one of several personalized responses will come up:

  • acknowledgement that your return has been received and is being processed,
  • your refund’s mailing date or direct deposit date, or
  • a notice that the IRS could not deliver your refund due to an incorrect address, at which point, you can update your address online using the Where’s My Refund? feature.

Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues that are affecting your refund. For example, if you do not receive your refund within 28 days of the mailing date shown on Where’s My Refund?, you can start a refund trace online.

Where’s My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader with a Braille display. Where’s My Refund? is compatible with various modes of this screen reader.

IRS2Go is a free IRS smartphone app that lets taxpayers check on the status of their tax refunds. For download information, visit IRS2Go. It is available for both Apple and Android.

Where’s My Refund? provides the most up-to-date information that the IRS has. There’s no need to call the IRS unless Where’s My Refund? tells you to do so. Where’s My Refund? is updated every 24 hours (usually overnight), so you only need to check it once a day. Please call us if you have any questions or encounter any problems.

If You Owe the IRS a Lot of Money, You May Not Want to Plan Any Out-of-the-Country Trips

As promised several months back, the IRS has begun to crack down on seriously delinquent taxpayers. A law passed on Dec. 4, 2015, that requires the IRS to notify the U.S. State Department when someone has “seriously delinquent tax debt,” after which the State Department will generally deny an application for issuance or renewal of a passport for that individual and can even revoke or limit a previously issued passport.

It has taken the IRS and the State Department some time to establish the procedures for this program, but they are finally in place and are being implemented in January 2018.

A “seriously delinquent tax debt” is the unpaid, legally enforceable, and assessed federal tax liability of an individual that is greater than $51,000, for which a notice of federal tax lien has been filed and the taxpayer’s right to a hearing has been exhausted or lapsed, or a levy has been issued. The total amount of all current tax liabilities (including penalties and interest) for all tax years and periods meeting these criteria is included in determining if the $51,000 threshold is met.

Seriously delinquent tax debts do not include those for which the IRS or the Justice Department and a taxpayer have entered into a valid payment agreement, such as an installment agreement or an offer-in-compromise payment plan. Tax debts for which collection has been suspended pending a due-process hearing or those suspended as a result of an innocent spouse claim are also excluded from the definition of a seriously delinquent tax debt.

The law requires the IRS to contemporaneously notify a taxpayer when it has certified the taxpayer as having a seriously delinquent tax debt, so that the taxpayer has time to request a judicial review before steps are taken to deny or revoke a passport.

This provision does not apply to an individual serving in a combat zone or participating in a contingency operation.

If you or someone you travel with has a seriously delinquent tax debt and you have questions about this subject, please give us a call.

Using Online Agents to Rent Your Home Short Term? You May Be Surprised at the Tax Ramifications

If you are among the many taxpayers renting your first or second home using rental agents or online rental services that match property owners with prospective renters, such as Airbnb, VRBO and HomeAway, then you should know the IRS has special rules related to short-term rentals.

When property is rented for short periods, special (and sometimes complex) taxation rules come into play, which can make the rents excludable from taxation; other situations may force the rental income and expenses to be reported on Schedule C (as opposed to Schedule E).

If you have been renting your home or second home for short periods of time, here is a synopsis of the rules governing short-term rentals so you can prepare yourself for the upcoming tax season.

  • Rented for Fewer Than 15 Days During the Year: If you rent your property for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. However, interest and property taxes are still deductible as itemized deductions on your Schedule A.
  • Rented for an Average of 7 Days or Less: Under normal circumstances, rentals are treated as passive activities, which are reported on a Schedule E, and net profit from the rental activity is not subject to self-employment tax. But the special rules treat short-term rentals averaging 7 days or less as a trade or business similar to that of a hotel or motel, with the income and expenses reported on Schedule C, and the profits are subject to both income tax and self-employment tax.
  • Rented for an Average of 8 to 30 Days: Even rentals for longer than 7 days are treated as a trade or business when substantial personal services are provided to the short-term tenant. Substantial services are those that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service. Substantial services do not include the furnishing of heat and light, the cleaning of public areas, trash collection, and such.
    When extraordinary services are provided, the rental is treated as a trade or business and reported on Schedule C regardless of the average rental period. However, it would be extremely rare for this to apply to short-term rentals of your home or second home.
  • Exception to the Significant Services Rule – If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as the cleaning of public areas and trash collection), and if the rental also includes maid and linen services at a cost of less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule.

A loss from this type of activity, even when reported on your Schedule C as a trade or business, is still treated as a passive activity loss and can only be deducted against passive income. The $25,000 loss allowance that applies to some Schedule E rentals is not available for rental activities reportable on Schedule C.

It is important that you keep a record of not only the rental income from each tenant but also the duration of each rental, so the average rental term for the year can be determined. If you have questions about your rental activities, 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.

Not All Interest Is Deductible For Taxes

A frequent question that arises when borrowing money is whether or not the interest will be tax deductible. That can be a complicated question, and unfortunately not all interest an individual pays is deductible. The rules for deducting interest vary, depending on whether the loan proceeds are used for personal, investment, or business activities. Interest expense can fall into any of the following categories:

  • Personal interest – is not deductible. Typically this includes interest from personal credit card debt, personal car loan interest, home appliance purchases, etc.
  • Investment interest – this is typically paid on debt incurred to purchase investments such as land, stocks, mutual funds, etc. However, interest on debt to acquire or carry tax-free investments is not deductible at all. The annual investment interest deduction is limited to “net investment income,” which is the total taxable investment income reduced by investment expenses (other than expenses related to investments that produce non-taxable income). The investment interest deduction is only allowed to taxpayers who itemize their deductions.
  • Home mortgage interest – includes the interest on a taxpayer’s primary home and a single second home. However, the debt for which the interest is deductible is generally limited to $1 million of home acquisition debt (debt used to purchase or substantially improve the home(s)) and $100,000 of equity debt between the first and second homes. Both the acquisition debt and the equity debt must be secured by the home(s) to be deductible as home mortgage interest. In addition, home mortgage interest is only deductible by those who itemize their deductions. Tax Tip: Equity debt can be used to purchase personal use items, and thereby a tax deduction for the interest paid on that loan is allowed.
  • Passive activity interest – includes interest on debt that’s for business or income-producing activities in which the taxpayer doesn’t “materially participate” and is generally deductible only if income from passive activities exceeds expenses from those activities. The most common passive activities are probably real estate rentals. For rental real estate activities, there is a special passive loss allowance of up to $25,000 for taxpayers who are active but not necessarily material participants in the rental. The $25,000 phases out for taxpayers with adjusted gross income between $100,000 and $150,000.
  • Trade or business interest – includes interest on debts that are for activities in which a taxpayer materially participates. This type of interest can generally be deducted in full as a business expense.

Because of the variety of limits imposed on interest deductions, the IRS provides special rules to allocate interest expense among the categories. These “tracing rules,” as they are called, are generally based on the use of the loan proceeds. Thus interest expense on a debt is allocated in the same manner as the allocation of the debt to which the interest expense relates. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures, i.e., “follow the money.”

These tracing rules, combined with the restrictions associated with the various categories of interest, can create some unexpected results. Here are some examples:

Example 1: A taxpayer takes out a loan secured by his rental property and uses the proceeds to refinance the rental loan and buy a car for personal use. The taxpayer must allocate interest expense on the loan between rental interest and personal interest for the purchase of the car, and even though the loan is secured by the business property, the personal loan interest portion is not deductible.

Example 2: The taxpayer borrows $50,000 secured by his home to be used in his consulting business. He has no other equity debt on his home. He deposits the $50,000 into a checking account he only uses for his business. He cannot deduct the interest on his business and must instead deduct the interest as home equity debt interest on his Schedule A (if he itemizes his deductions), as the debt is secured by his home and is less than the $100,000 limit for equity indebtedness.

Example 3: The taxpayer owns a rental property free and clear and wants to purchase a home. He obtains a loan on the rental to purchase the home. Under the tracing rules, the taxpayer must trace the use of the funds to their use, and as the debt was not used to acquire the rental, the interest on the loan cannot be deducted as rental interest. The funds can be traced to the purchase of the taxpayer’s home. However, for interest to be deductible as home mortgage interest, the debt must be secured by the home, which it is not. Result: the interest is not deductible anywhere.

As you can see, it is very important to plan your financing moves carefully, especially when equity in one asset is being used to acquire another. Please call us for assistance in applying the various interest limitations and tracing rules to ensure you don’t inadvertently get some unexpected results.

Ignoring Those IRS Notices Only Makes It Worse

Remember those 1099s, W-2s, K-1s and other informational forms you receive each year reporting your interest, dividends, sales, wages, retirement income, IRA withdrawals, health insurance forms and other items having to do with your tax return? Well, the IRS also gets this information and feeds it into its computers. Thanks to modern computer technology, the IRS is able to match that information to what you reported on your tax return, and if something significant is omitted or there’s a discrepancy with the numbers, the IRS is going to send you a letter asking for an explanation or a tax payment. You will also receive correspondence if you don’t file a return and the data the IRS has indicates that you should have filed. It has form letters for just about every possible situation.

Most frequently, these notices will include a proposed tax due, plus interest and/or penalties, along with an explanation of the examination process and how you can respond. However, the letters must, by law, advise you of your rights and other information. Thus, these letters can become overly lengthy and are sometimes difficult to understand. That is why it is important to have a trained eye review them before you take any action.

Do not procrastinate or throw the letter in a drawer hoping the issue will go away. After a certain period of time, another letter will automatically be produced. And, as you might expect, each succeeding letter will become more aggressive and more difficult to deal with, and it may reach the point where you might have to go to tax court to argue your case or pay whatever amount of money the IRS is demanding.

Most importantly, don’t automatically pay an amount the IRS is requesting unless you are positive it is correct. Quite often, you really do not owe the amount being billed, and it will be difficult and time consuming to get your payment back.

It is always good practice to have a tax professional review the correspondence and respond to the IRS in a timely manner. Also, note that these “love letters” from the IRS will come by regular mail, not email. If you receive an email from someone claiming to be from the IRS and demanding a tax payment, this communication will be a fraud, since the IRS does not use email for this purpose. Please call this office immediately in regards to any notice you receive about your tax returns.

Hurricane Disaster Loss Tax Ramifications

With the historic flooding and damage caused by recent hurricanes, President Trump has declared the affected areas disaster areas. If you were an unlucky victim and suffered a loss as a result of these disasters, you may be able to recoup a portion of that loss through a tax deduction. When you suffer a casualty loss within a federally declared disaster, you can elect to claim the loss in one of two years: the tax year in which the loss occurred or the immediately preceding year.

Income Tax Casualty Loss – By taking the deduction for a 2017 disaster area loss on the prior year (2016) return, you may be able to get a refund from the IRS before you even file your tax return for 2017, the loss year. You have until six months after the original due date of the 2017 return to make the election to claim it on your 2016 return, in most cases by filing an amended 2016 return to claim the disaster loss. Before making the decision to claim the loss in 2016, you should consider which year’s return would produce the greater tax benefit, as opposed to your desire for a quicker refund.

If you elect to claim the loss on either your 2016 original or amended return, you can generally expect to receive the refund within a matter of weeks, which can help to pay some of your repair costs.

If the casualty loss, net of insurance reimbursement, is extensive enough to offset all of the income on the return, whether the loss is claimed on the 2016 or 2017 return, and results in negative income, you may have what is referred to as a net operating loss (NOL). When there is an NOL, the unused loss can be carried back two years and then carried forward until it is all used up (but not more than 20 years), or you can elect to only carry the unused loss forward.

Determining the more beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and the applicable tax rates. The analysis should also consider the effect of a potential NOL.

Ordinarily, casualty losses are deductible only to the extent they exceed $100 plus 10% of your adjusted gross income (AGI). Thus, a year with a larger amount of AGI will cut into your allowable loss deduction and can be a factor when choosing which year to claim the loss.

For verification purposes, keep copies of local newspaper articles and/or photos that will help prove that your loss was caused by the specific disaster.

As strange as it may seem, a casualty might actually result in a gain. This sometimes occurs when insurance proceeds exceed the tax basis of the destroyed property. When a gain materializes, there are ways to exclude or postpone the tax on the gain.

Extension of Filing and Payment Due Dates – The IRS has announced that Hurricane Harvey and Irma victims have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments.

This tax relief postpones various tax filing and payment deadlines that occurred starting on:

  • Aug. 23, 2017 for Harvey victims,
  • September 4, 2017 for Irma victims in Florida, and
  • September 5, 2017 for Irma victims in Puerto Rico and the Virgin Islands.

As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes:

  • The Sept. 15, 2017 and Jan. 16, 2018 deadlines for individuals making quarterly estimated tax payments.
  • The 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief and may be subject to late payment penalties.
  • A variety of business tax deadlines are also affected, including the Oct. 31 deadline for quarterly payroll and excise tax returns. Businesses with extensions, including among others, calendar-year partnerships whose 2016 extensions run out on Sept. 15, 2017 and calendar-year tax-exempt organizations whose 2016 extensions run out on Nov. 15, 2017, also have the additional time. The disaster relief page on www.irs.gov has details on other returns, payments and tax-related actions qualifying for the additional time.
  • In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due during the first 15 days of the disaster period. Check out the disaster relief page for the time periods that apply to each jurisdiction.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in a disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside of a disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

For information on government-wide efforts related to:

If you need further information on filing extensions, casualty and disaster losses, your particular options for claiming a loss, or if you wish to amend your 2016 return to claim your 2017 loss, please give us a call.

Tax Reform Framework Released

President Trump announced a nine-page framework for tax cuts on September 27, 2017. The Framework capitalizes on many ideas previously presented in the President’s Tax Outline and in the House Republican Blueprint. Congressional tax-writing committees have a lot of work to do in refining the details, but it gives us an idea of where tax reform may be headed.

Individual Tax Rates

The current rates now fall into seven brackets, ranging from 10% to 39.6%. The proposed plan would consolidate the current individual tax brackets into three: 12%, 25% and 35%. An additional top tax rate may be added and apply to the “highest-income taxpayers,” but it fails to mention the income level at this might take effect, or the rate that would be imposed.

The plan also does not specify which income levels would be taxed at each rate— and if the highest rate is set at 35 percent—it would greatly benefit the wealthiest taxpayers, who currently pay a top rate of 39.6 percent on income greater than $418,400 for single filers.

Child and Dependent Care Credits

Although the rate applied to the lowest income bracket would increase, typical families in the existing 10 percent bracket may be better off because of a larger child tax credit as well as an increase in the standard deduction. The child tax credit would be “significantly” increased, including a refundable portion offered to taxpayers who have higher levels of income than current law allows.

A new, non-refundable credit of $500 for those caring for non-child dependents (such as an elderly parent) would be added.

Standard and Itemized Deductions

Most itemized deductions would be eliminated, meaning that large medical expenses, state and local income taxes, real estate taxes, investment expenses and investment interest expense would no longer be deductible. However, home mortgage interest, charitable contributions, and tax benefits encouraging work, higher education and retirement savings would be retained.

The standard deduction and personal exemptions would be combined into one larger standard deduction: $12,000 for single filers and $24,000 for married taxpayers filing jointly. Home mortgage interest, charitable contributions, and tax benefits encouraging work, higher education and retirement savings would be retained. This means that Such a revision of the tax code, if enacted, would greatly increase the number of taxpayers choosing the standard deduction. The new, single deduction would be higher for many filers, except those who claim multiple children

The Alternative Minimum Tax (AMT) and the federal estate tax and generation-skipping transfer tax would be repealed under this framework. It is suspected that that the repeal will apply to gift taxes, as well.

Business and Corporate Taxes

The tax rate would be reduced for regular or “C” corporations from 35% to 20%. The corporate Alternative Minimum Tax (“AMT”) would be eliminated along with other methods to reduce the double taxation of corporate earnings.

Many small businesses are structured as “S” corporations, partnerships, limited liability companies (LLCs), or sole proprietorships; all of which pass through business profits and losses to their owners’ personal tax returns. Thus, “C” corporation income taxes may be avoided but the owners face personal tax rates as high as 39.6%. Pass-throughs now make up about 95 percent of businesses in the country and the bulk of corporate tax revenue for the government.

Under the proposed framework, business income from these “pass-through entities” would be taxed at a rate no higher than 25%. Such a measure would need to be drafted carefully in order to prevent personal income of wealthy individuals from being reclassified into lower-taxed business income. Whether these distributions would then be subject to a second level of tax at the individual owner level also needs to be addressed.

Deductions and Tax Credits

Most special deductions and tax credits, other than the R&D credit and the low-income housing tax credit, would be eliminated. It’s not clear which deductions will be eliminated; however, the Section 199 deduction was specifically mentioned as being eliminated.

Replace system of taxing companies’ worldwide income with a 100% exemption for dividends from foreign subsidiaries in which U.S. parent has a 10% stake or more. Reduce tax rate and tax on a global basis the foreign profits of U.S. multinational corporations.

Tax Write Offs for Depreciable Assets

Businesses that invest in depreciable assets, other than buildings, after September 27, 2017 would write them off immediately. This tax benefit, with no upper limit, would be in place for at least five years. As a tradeoff, the tax-deductibility of interest expense incurred by most taxable corporations would be partially limited.

If you have questions about how the proposed tax reform might affect you, please call us.

 

Hurricane Harvey Tax Ramifications and Casualty Loss

With the historic flooding and damage caused by Hurricane Harvey, President Trump has declared the affected area a disaster area. If you were an unlucky victim and suffered a loss as a result of this disaster, you may be able to recoup a portion of that loss through a tax deduction. When you suffer a casualty loss within a federally declared disaster, you can elect to claim the loss in one of two years: the tax year in which the loss occurred or the immediately preceding year.

Income Tax Casualty Loss – By taking the deduction for a 2017 disaster area loss on the prior year (2016) return, you may be able to get a refund from the IRS before you even file your tax return for 2017, the loss year. You have until six months after the original due date of the 2017 return to make the election to claim it on your 2016 return, in most cases by filing an amended 2016 return to claim the disaster loss. Before making the decision to claim the loss in 2016, you should consider which year’s return would produce the greater tax benefit, as opposed to your desire for a quicker refund.

If you elect to claim the loss on either your 2016 original or amended return, you can generally expect to receive the refund within a matter of weeks, which can help to pay some of your repair costs.

If the casualty loss, net of insurance reimbursement, is extensive enough to offset all of the income on the return, whether the loss is claimed on the 2016 or 2017 return, and results in negative income, you may have what is referred to as a net operating loss (NOL). When there is an NOL, the unused loss can be carried back two years and then carried forward until it is all used up (but not more than 20 years), or you can elect to only carry the unused loss forward.

Determining the more beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and the applicable tax rates. The analysis should also consider the effect of a potential NOL.

Ordinarily, casualty losses are deductible only to the extent they exceed $100 plus 10% of your adjusted gross income (AGI). Thus, a year with a larger amount of AGI will cut into your allowable loss deduction and can be a factor when choosing which year to claim the loss.

For verification purposes, keep copies of local newspaper articles and/or photos that will help prove that your loss was caused by the specific disaster. As strange as it may seem, a casualty might actually result in a gain. This sometimes occurs when insurance proceeds exceed the tax basis of the destroyed property. When a gain materializes, there are ways to exclude or postpone the tax on the gain.

Extension of Filing and Payment Due Dates – The IRS has announced that Hurricane Harvey victims in parts of Texas have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments.

This tax relief postpones various tax filing and payment deadlines that occurred starting on Aug. 23, 2017. As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes:

  • The Sept. 15, 2017 and Jan. 16, 2018 deadlines for individuals making quarterly estimated tax payments.
  • The 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief and may be subject to late payment penalties.
  • The Oct. 31 deadline for quarterly payroll and excise tax returns by certain businesses. In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after Aug. 23 and before Sept. 7, if the deposits are made by Sept. 7, 2017. Details on available relief can be found on the IRS web site related to disaster relief.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

For information on government-wide efforts related to Hurricane Harvey, please visit: https://www.usa.gov/hurricane-harvey.

If you need further information on filing extensions, casualty and disaster losses, your particular options for claiming a loss, or if you wish to amend your 2016 return to claim your 2017 loss, please give our office a call.