Navigating the Maze of Tax Reform

“Trying to navigate the maze of tax reform can be frustrating and seem challenging and almost impossible at times. “  By Trenda Hackett, CPA

As I’m sure you are aware, the Tax Cuts and Jobs Act, also known as the TCJA, was signed into law on December 22, 2017.  Most provisions of the Act are not effective until January 1, 2018 or later. However, some provisions are retroactively effective.

I’d like to take this opportunity to highlight some of those retroactive items that you should be aware of as you approach this tax season. While this is not intended to be a detailed explanation regarding these topics, I will suggest areas that may require additional research if you think they may impact you, or any of your clients.

Some Retroactive Items

Medical Expense Deduction:  The AGI threshold on medical expense deductions is reduced to 7.5% for all taxpayers for tax years beginning after December 31, 2016 and ending before January 1, 2019.

State and Local Property Taxes:  Because of the $10,000 limit starting in 2018 on the deduction for state and local property taxes, many taxpayers prepaid 2018 property taxes in 2017. However, the IRS has announced that 2018 property taxes are not deductible in 2017 unless they were assessed prior to 2018. In addition, prepayment in 2017 of 2018 state income tax did not create a 2017 deduction.

Mortgage Interest:  A mortgage interest deduction for interest paid on the first $1 million of acquisition debt was previously allowed on Schedule A. Although the Act lowered to $750,000 the amount of acquisition debt for which interest may be deducted, the $1 million acquisition debt limit is grandfathered for loans taken out prior to December 15, 2017. This deduction is also available if an existing mortgage is refinanced or if a taxpayer had a binding written contract prior to December 15, 2017 for purchase of a principal residence, for which closing occurred prior to January 1, 2018.

Disaster Area Losses:  

  • As it relates to net disaster losses from 2016 disaster areas, the $100 casualty floor has been increased to $500 for 2016 and 2017, and the 10% of AGI deduction is no longer applicable.
  • Taxpayers that do not itemize for 2016 or 2017 are retroactively allowed to deduct 2016 disaster area losses by adding the net disaster loss to the standard deduction.
  • Favorable tax treatment is provided for qualified 2016 disaster area losses; and qualified 2016 disaster distributions can be included in gross income over a three-year period of time. 2016 disaster area victims may make penalty-free early retirement plan withdrawals.

Depreciation:  Previously, bonus depreciation was established at 50% for 2017 and was scheduled to be phased out completely in subsequent years. However, under the Act, bonus depreciation is increased to 100% for property acquired and placed in service after September 27, 2017 and before January 1, 2023 (or 2024 for certain property with longer production periods).  Bonus depreciation is also extended to used property and to acquisitions of real estate, but is once again scheduled to be phased out starting in 2023 and completely eliminated by 2027. Previously completed cost segregation studies may need to be revised to reflect the changes in bonus depreciation.

Update on Extenders

You or your clients may have been hoping for extension to 2017 of some items that had been set to expire as of December 31, 2016. Unfortunately, none of the following items were extended to 2017:

  • Builders credit for energy-efficient homes
  • Deduction for energy-efficient commercial buildings
  • Mortgage insurance premium deduction
  • Qualified tuition and fees deduction

2018 and forward

There are a few other notable items that you should be cognizant of during the 2018 filing season or in planning for 2018 going forward.

  • Distributions up to $10,000 per student from Section 529 Plans can now be applied to public, private, or religious elementary and secondary schools rather than being strictly for higher education.
  • A new Section 199A deduction equal to 20% of qualified business income may be available to trusts or individuals that own sole proprietorships, partnerships, or S corporations. The deduction may be limited based on taxable income, capital gains, or business income.
  • The maximum corporate tax rate is 21%; and corporate alternative minimum tax has been eliminated.
  • Like-Kind Exchanges are no longer allowed for personal property, with a transitional rule provided for 2017.
  • No entertainment expense deduction is allowed for activities generally considered to be entertainment, amusement, or recreation. The 50% deduction limit for meals has been expanded to include meals that meet the employer convenience or de minimis rules.
  • After 2017, the following itemized deductions have been eliminated: employee business expenses, tax preparation fees, investment interest expense, and personal casualty and theft losses (other than those related to federally declared disaster areas).

In addition to the retroactive elements of the Tax Cuts and Jobs Act mentioned above relative to 2017 returns and the few mentioned for 2018 and beyond, there are changes for individuals that include new tax brackets, an increased standard deduction, the elimination of personal exemptions for the taxpayer and dependents, and the repeal of the individual mandate under the Affordable Care Act  and changes for businesses that include limits on the deduction for business interest and other items . There are significant changes to international tax and pass-through entities such as partnerships and S corporations as well as changes to estate and gift tax and pension and benefits.

Want to learn more about Tax Reform that impacts you or your clients?  The Tax Alliance Conference planning committee will have speakers highlighting Tax Reform changes during our June 5–7, 2018 conference.  They  will be on hand to answer your questions and help you get through the maze of tax reform.  Join us for the conference!  We don’t believe you will find better CPE especially when you consider the cost!  Check it out at www.taxalliance.org.

 

IRS Provides Tax Relief for Victims of Hurricane Harvey

The Internal Revenue Service announced this week that individual and business filers who are victims of Hurricane Harvey whose returns are under a valid extension, have until January 31, 2018 to file certain tax returns and make certain tax payments.

Effective date of Relief:  This relief is effective for tax filing and payment deadlines that occurred beginning on August 23, 2017.

Postponement Period:  August 23, 2017 – January 31, 2018

Texas Counties Eligible for Relief:  See IRS Disaster Relief Page for up to date information

How is Relief Granted: The IRS automatically grants relief (late filing and late payment penalty) to a taxpayer with an IRS address of record located in the disaster area.

Caution: Taxpayers should be very careful not to change their address of record with the IRS to their current address due to relocation.

What does this mean for your individual and business clients?

Individuals:

  • 2016 federal income tax returns with a valid extension until October 16, 2017 are now due January 31, 2018.
  • Estimated tax payments with an original due date of September 15, 2017 and January 16, 2018 are now due January 31, 2018.

Businesses:

  • 2016 federal income tax returns with a valid extension until September 15, 2017 or October 16, 2017, are now due January 31, 2018.
  • Calendar and fiscal year businesses with estimated tax payments due that falls within the postponement period are now due January 31, 2018.
  • Quarterly payroll and excise tax returns with an original due date of October 31, 2017 are now due January 31, 2018.
  • Failure to deposit penalties will be waived for late paid payroll and excise tax deposits due on or after August 23, 2017 and before September 7, 2017, if deposits are made by September 7, 2017

IMPORTANT NOTE:  If you have clients that do not reside in the disaster area but their records necessary to meet a tax deadline occurring during the postponement period are located in the disaster area, they are eligible for relief.

For more information, see the entire IRS News Release (IR-2017-135) on the IRS website.

Visit the Tax Alliance Conference page for more information and updates and register for the 2018 Tax Alliance Conference in Plano, TX, June 5 – 7, 2018.

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Tax Professionals Beware!

The 2017 tax filing season is here!

Thieves have already geared up to file millions of fraudulent tax returns before the real taxpayer.  In a previous IRS CID presentation, the IRS indicated that thieves filed as many as 17 million tax returns on the first day of the filing season.  As the IRS, states, and tax industry continue the fight to combat identity theft by putting mechanisms in place to halt the processing of tax returns and freeze refunds due to potential identity theft, thieves will naturally seek other ways to steal taxpayer information and file fraudulent returns to get them through the system as legitimate returns.

IRS is warning tax professionals to secure their systems and protect their client data.  Through the Protect Your Clients; Protect Yourself campaign launched in September 2016 via the Security Summit partnership between IRS, states, and tax industry, the IRS has issued a series of tax tips geared toward educating and assisting tax professionals in protecting themselves and protecting their client’s data.

So you are not caught by surprise, let’s recap some of the email scams against tax professionals that you should be on the lookout for:

IR-2017-03, January 11, 2017 –  New Two Stage Email Scheme – In this scam tax professionals receives one email that asks the tax professional a question such as, “I need a preparer to file my taxes”; if the tax professional responds a second email is received with a PDF attachment or embedded web address where tax professional think they are downloading a potential client’s tax info but in reality thieves are collecting preparer’s email address and password and other information.

IR-2016-145, Nov. 4, 2016 – New e-Services Scam – The subject line for the fraudulent email is “Security Awareness for Tax Professionals.” The “From” line is “Your e-Services Team.” It has both an IRS logo and an e-services logo that hyperlinks to a URL verified as a phishing site. Thieves attempt to steal e-Services username and passwords.

Special Edition Tax Tip – September 23, 2016Fake Tax Bill Scam – Scammers emailing fake tax bills in the form of CP2000 notice related to the Affordable Care Act (ACA) requesting information regarding 2014 coverage and requesting checks be made out to I.R.S. and sent to “Austin Processing Center”. Please be aware that IRS requests checks be made out to Department of Treasury instead of I.R.S. and also there is no such IRS center called the “Austin Processing Center”.

IR-2016-119, September 2, 2016Thieves are able to access tax professional’s computers and use remote technology to take control, accessing client data and completing and e-filing returns but directing refunds to criminals’ own accounts.

IR-2016-103, August 11, 2016Email scheme mimicking tax software providers attempting to trick recipients into clicking on a bogus link appearing to be an update to their software package but really downloading a program to track the tax professional’s keystrokes to eventually steal information.

The following tips are suggested to protect yourself and your client from a data breach:

  1. Make sure your virus software is up to date and run a security scan to search for viruses and malware.
  2. Use encryption software to safeguards your client’s sensitive financial data such as tax returns or other tax information stored on your hard drive.
  3. Protect your wireless network with a strong password.
  4. Never use public Wi-Fi to share sensitive data. (Note: If Wi-Fi does not require password, it’s probably not secure.)
  5. Use strong passwords (minimum of 8 characters including lower and upper case letter, number, and special character) for both computer access and access to your tax software.
  6. Do not click or open any attachments from unknown senders.
  7. Create internal policies and educate staff members about the dangers of phishing scams in the form of emails, texts, and phone calls.
  8. Review any software your employees use to remotely access your network and/or your IT support vendor uses to remotely trouble shoot technical problems and support systems.
  9. Monitor your PTIN for any suspicious activity.  (Click here for IRS Instructions)
  10. Back up data periodically via your protected cloud storage or separate disk.

If you suffer a data breach or other security incident, see IRS Protect Your Clients; Protect Yourself Tax Tip Number 7, January 18, 2016 to determine next steps.

For more of tax tips and ideas and to hear directly from the IRS, come to the Tax Alliance Conference in Plano, TX, June 6-8 of 2017.

What Aetna’s Withdrawal Means for Obamacare – The New Yorker

Since we as tax practitioners are faced with exceedingly tricky and complex issues regarding The Affordable Care Act, the following article is found to be a most thought-provoking and honest observation of Obamacare.  With 8.3 million fewer people enrolled through the exchanges this year than projected and with some insurers pulling out of most of them, but with twenty million more people covered by health insurance because of it, the article addresses current and future challenges for Obamacare.

Source: What Aetna’s Withdrawal Means for Obamacare – The New Yorker

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