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October

Are You a Member of the Sandwich Generation?

If you’re currently taking care of your children and elderly parents, count yourself among those in the “Sandwich Generation.” Although it may be personally gratifying to help your parents, it can be a financial burden and affect your own estate plan. Here are some critical steps to take to better manage the situation.

 

Identify key contacts

Just like you’ve done for yourself, compile the names and addresses of professionals important to your parents’ finances and medical conditions. These may include stockbrokers, financial advisors, attorneys, CPAs, insurance agents and physicians.

 

List and value their assets

If you’re going to be able to manage the financial affairs of your parents, having knowledge of their assets is vital. Keep a list of their investment holdings, IRA and retirement plan accounts, and life insurance policies, including current balances and account numbers. Be sure to add in projections for Social Security benefits.

 

Open the lines of communication

Before going any further, have a frank and honest discussion with your elderly relatives, as well as other family members who may be involved, such as your siblings. Make sure you understand your parents’ wishes and explain the objectives you hope to accomplish. Understandably, they may be hesitant or too proud to accept your help initially.

 

Execute the proper documents

Assuming you can agree on how to move forward, develop a plan incorporating several legal documents. If your parents have already created one or more of these documents, they may need to be revised or coordinated with new ones. Some elements commonly included in an estate plan are:

 

Wills. Your parents’ wills control the disposition of their possessions, such as cars, and tie up other loose ends. (Of course, jointly owned property with rights of survivorship automatically pass to the survivor.) Notably, a will also establishes the executor of your parents’ estates. If you’re the one providing financial assistance, you may be the optimal choice.

 

Living trusts. A living trust can supplement a will by providing for the disposition of selected assets. Unlike a will, a living trust doesn’t have to go through probate, so this might save time and money, while avoiding public disclosure.

 

Powers of attorney for health and finances. These documents authorize someone to legally act on behalf of another person. With a durable power of attorney, the most common version, the authorization continues after the person is disabled. This enables you to better handle your parents’ affairs.

 

Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. Make sure that your parents’ physicians have copies, so they can act according to their wishes.

 

Beneficiary designations. Undoubtedly, your parents have completed beneficiary designations for retirement plans, IRAs and life insurance policies. These designations supersede references in a will, so it’s important to keep them up to date.

 

Spread the wealth

If you decide the best approach for helping your parents is to give them monetary gifts, it’s relatively easy to avoid gift tax liability. Under the annual gift tax exclusion, you can give each recipient up to $15,000 (for 2018) without paying any gift tax. Plus, payments to medical providers aren’t considered gifts, so you may make such payments on your parents’ behalf without using any of your annual exclusion or lifetime exemption amount.

 

Mind your needs

If you’re part of the Sandwich Generation, you already have a lot on your plate. But don’t overlook your own financial needs. Contact us to discuss the matter further.

 

 

 

White House tax-cut claim stirs conservative economists' doubts

By Lynnley Browning

 

Several conservative economists, including one of President Donald Trump’s campaign advisers, disputed the White House’s claim that a corporate tax cut Trump signed into law last year has already paid for itself.

 

Trump’s top economic adviser, Kevin Hassett, highlighted economic stimulus from the tax cuts as part of a presentation to reporters on Monday intended to strengthen Trump’s claim that U.S. economic growth is due to his policies.

 

“I think that the notion that the corporate tax side has about paid for itself is clearly in the data,” Hassett said.

 

Some of his colleagues disagree. Stephen Moore, an economist at the conservative Heritage Foundation who advised Trump’s campaign, said Hassett’s claim is “a little premature, because we don’t know how long this boom will last.”

 

Kyle Pomerleau, an economist at the conservative Tax Foundation, and Peter Morici, a conservative economist at the University of Maryland, also said Hassett’s claim went too far.

 

Projecting the long-term impact of the GOP tax cuts is difficult because there’s little precedent in recent times for such a stimulus when the economy is relatively strong and unemployment is historically low. For example, after the Reagan tax revamp became law in October 1986, the economy expanded for almost four more years, but the jobless rate at the time was 7 percent, compared with 4.1 percent in December 2017.

 


Erroneous tweet

The question of how much economic growth can be attributed to Trump’s presidency and the tax overhaul is figuring prominently ahead of the congressional midterm elections. House Republicans introduced a second phase of tax legislation on Monday to try to boost the law’s popularity, while Democrats attack the cuts as a giveaway to wealthy individuals and corporations.

 

The president erroneously tweeted on Monday that growth in GDP was higher than the unemployment rate for the first time in over a century. The Trump administration has recently promoted false statistics on jobless rates and the stock market’s performance as it has touted the president’s record on the economy.

 

Pomerleau said he disagreed with the assessment that corporate tax cuts have paid for themselves already or “that they would pay for themselves at all.”

 

In addition to slashing the corporate rate to 21 percent from 35 percent, the law set up international guardrails to prevent multinationals from funneling profits to low-tax and no-tax havens like Ireland and the Cayman Islands.


Shifting profits

So far, Pomerleau said, he’s not seeing much evidence of the new guardrails deterring profit-shifting. He cited a recent report from the Congressional Budget Office that shows corporate income tax receipts have dropped by 28 percent in the the first nine months of the fiscal year, with about one-third of the decline coming in June -- when the international provisions were already in effect.

 

“The only conceivable way a corporate rate cut would pay for itself” would be through companies shifting less of their profits overseas, Pomerleau said. “But what you can infer from CBO is that we’re not seeing a significant amount of profits coming back to the U.S.”

 

The government’s budget deficit is projected to increase to more than $1 trillion in fiscal 2020, in part because of the tax cuts, according to CBO. The shortfall was $665 billion in the year that ended Sept. 30, 2017.

 

The corporate rate cut is estimated by Congress’s official scorekeeper to cost more than $1.3 trillion over the next decade -- the most expensive provision in the $1.5 trillion tax bill. On the international side, it also slashes the rate on corporate profits stashed overseas. The overhaul temporarily allows for full deductions of capital expenses, and cuts rates for individuals and pass-through businesses like partnerships.

 

“You get some of the money back through tax cuts, but you don’t get it all,” Morici said. “It won’t be everything you lost by cutting taxes altogether.”

 

 

 

The art of the steal: Will reform fight tax cheats?

By Jeff Stimpson

 

One of the claims made by proponents of last year’s once-in-a-generation tax reform act was that it would limit the scope for taxpayers to cheat on their returns by lowering the complexity of the Tax Code — but so far, tax professionals seem pessimistic.

 

“Tax reform failed to properly fund the IRS. Pervasively inadequate enforcement budget allocations have caused and will continue to more robustly cause taxpayers to be less than fully forthright with their practitioners,” said John Dundon, an Enrolled Agent and president of Taxpayer Advocacy Services in Englewood, Colorado. “Circular 230 lacks the teeth to bridge the gap.”

 

“The potential exists for it to increase, perhaps exponentially, because I don’t think that the IRS will have enough security measures in place given all the code changes,” said EA Laurie Ziegler at Sass Accounting in Saukville, Wisconsin.

 

“The incidence of fraud, certainly on personal returns, will drop,” said Morris Armstrong, an EA and registered investment advisor with Armstrong Financial Strategies, in Cheshire, Connecticut. “If you think about it, you have eliminated a whole category where people may have had the opportunity to pad the return with imaginary expenses. The whole 2106, unreimbursed employee expenses has gone the way of civility. Imaginary advisor fees, investment seminar fees and tax return fees are gone."

 

“There will be opportunities for people to cheat on the refundable credit side,” Armstrong said, “and of course by not reporting all income.”

 

“As a forensic accountant specializing in divorce litigation support, I see a great deal of tax avoidance because it coincides with less income reporting and correspondingly lower child support and alimony payments,” said Susan Carlisle, a CPA with Carlisle Dorafshani Wohl and Associates, in Los Angeles.

 

“Almost everyone doesn’t like to pay taxes,” she said. “Small businesspeople, along with professionals, are more often particularly adept at reducing their taxable income. The IRS knows this. [Some] are so willing to play the audit lottery that they brazenly eliminate reporting a substantial portion of their income while simultaneously burying much of their personal expenses among their actual business expenses. The new tax laws will do little or nothing to change their stripes.”


If anything, Carlisle added, the new qualified business income deduction will continue to lower the amount of taxes they pay “because potentially another 20 percent of their taxable income will be reduced. Those who commit fraud will continue to do so,” Carlisle said. “Those that do not will seek the advice of tax professionals to learn how to allocate payroll and net flow-through income so as to maximize the new qualified business income deduction.”

 

“Because it will take some time for many preparers and IRS personnel to get familiar with the tax reform rules and start setting up audit programs to deal with the new laws, there will probably be more people trying to game the deduction system, just in different ways,” said CPA Brian Stoner in Burbank, Calif.

 

“Since many of the itemized deductions will be gone, there will probably be less fraud in that area, but business meals are a whole different problem, with the requirements for a deduction being so nebulous that it may make it a potential area of concern,” he said. “Plus with the IRS budget issues, there may not be resources to deal with a lot of the changes until later, which may lead many to pad deductions now when they think they can take better advantage.”

 

 

 

Congress introduces bill to phase in online sales tax collection

By Michael Cohn

 

A bipartisan group of lawmakers in the House has introduced legislation to clarify interstate sales tax collection requirements in the wake of the Supreme Court’s decision this year in South Dakota v. Wayfair.

 

In June, the Supreme Court overturned the physical presence, or nexus, standard from the 1992 decision in the case Quill Corp. v. North Dakota, enabling states to tax activity that has a “substantial nexus” within them (see Supreme Court abandons physical presence standard in Wayfair). The decision has sent states around the country scrambling to release varying guidance on how companies should proceed with taxing online sales (see When will the dust from Wayfair clear?). The bipartisan legislation, known as the Online Sales Simplicity and Small Business Relief Act, aims to provide a more orderly process for states to follow. The bill was introduced Friday by Rep. Jim Sensenbrenner, R-Wis., Anna Eshoo, D-Calif., Jeff Duncan, R-S.C., and Zoe Lofgren, D-Calif.

 

The bill would ban retroactive taxation, establish an orderly phase-in of compliance obligations, and create a small business exemption. It bars states from imposing sales tax collection duties on remote sellers for any sale that happened prior to June 21, 2018, the date that the Wayfair decision was handed down by the Supreme Court. It would also prevent states from imposing sales tax collection duties before Jan. 1, 2019. It provides a $10 million exemption for small business sellers, until the states produce a compact, approved by Congress, to simplify collection to the point where no small business exemption is necessary.

 

“This bipartisan legislation reins in the taxation free-for-all created by the Supreme Court’s ruling in Wayfair,” Sensenbrenner said in a statement. “Online sellers need clarity and stability in the sales tax arena. Our bill will protect small businesses and Internet entrepreneurs from excessive regulatory burdens. Throughout the Fifth Congressional District, I continually hear from businesses that they need ‘certainty.’ This bill provides that.”

 

An advocacy group, the National Taxpayers Union, issued a statement supporting the legislation. “Chaos is brewing across the country as states have scrambled to seize new tax power for themselves after the court’s ruling in Wayfair,” said Andrew Moylan, head of NTU’s Interstate Commerce Initiative. “By solving some of the most vexing questions, like retroactivity, state implementation dates, and obligations for small sellers, Congressman Sensenbrenner’s bill is a great start down the long path of crafting a remote sales tax system that underscores, rather than undermines, important principles of free markets, limited government and simplicity.” 

 

 

 

IRS warns of natural-disaster scams

By Jeff Stimpson

 

Even as cleanup in the Carolinas begins after Hurricane Florence, the IRS warned that scammers may well try to take advantage of taxpayers who want to help victims of major disasters.

 

Schemes normally start with unsolicited contact by telephone, social media, e-mail or in-person. Some impersonate charities to get money or private information from would-be donors, and bogus websites may use names similar to legitimate charities to trick donors into sending money or revealing personal financial information.

 

Some brazen scammers even claim to be working for or on behalf of the IRS to help victims file casualty-loss claims and get refunds, the agency said.

Never give cash or personal financial information, the IRS warned. IRS information on disaster-related tax issues, including provisions for tax relief, are on the disaster relief page on IRS.gov. The IRS site also has a search feature to help find or verify charities. 

 

 

 

Six ways to prepare for disaster

By Daniel Hood

 

Stocking up on water, shuttering the windows and even evacuating when appropriate are among the priorities when it comes to preparing for a major storm or other potential disaster, but with Hurricane Florence on everyone's minds, the Internal Revenue Service reminded taxpayers and businesses of some of the other precautions they might want to take, particularly around making sure their documents and other records are secure. Here's their advice, along with some other expert tips.

 

Start with a plan

While the majority of any disaster preparedness plan will focus on things like communication with family members or employees, physical safety, escape routes and the like, the IRS notes that it should also include plans for key documents, data, and lists of belongings and property.

 

Make copies of key documents

 

The IRS recommends keeping original documents like bank statements, tax returns, deeds, titles and insurance policies in a safe place in waterproof containers -- and copies of them should be kept with a family member or trusted friend somewhere outside the area that may be affected by the disaster. Scanning paper documents can also make it easier to transfer and save them elsewhere -- and note that many financial institutions can provide statements and other documents electronically.

 

Document what you have

The IRS recommends taking pictures of videos of the contents of a house or business, with a particular focus on high-value items. Those visual records can help support insurance claims, or claims for tax benefits in the aftermath of a disaster.


The service has workbooks for individuals (Publication 584, "Casualty, Disaster, and Theft Loss Workbook") and businesses (Publication 584-B, "Business Casualty, Disaster, and Theft Loss Workbook") to help them compile lists of belongings and business equipment.

 

Check on payroll providers

 

If your firm -- or your clients' businesses -- use a payroll service provider, the IRS recommends checking if they have a fiduciary bond, to protect you in case the payroll service provider defaults.

 

Know who to contact

 

Preparing a phone list of family members or critical business contacts is one of the first things to do in advance of a potential natural disaster, but the IRS also notes that there are other people you may want to contact.


For instance, in the case of a federally declared disaster, taxpayers can call (866) 562-5227 to talk to an IRS specialist trained to handle disaster-related issues, and they can get tax transcripts through the Get Transcript link on IRS.gov, by calling (800) 908-9946.


It will also be handy to have contact information for insurers, building managers or landlords, plumbers, electricians, and anyone else whose services or help you can imagine needing in the aftermath of a disaster.

 

Make sure backups are working

 

Business data and systems should be backed up on a daily basis to a location that's not just off-site, but in an entirely different part of the country. But just backing up isn't enough -- businesses should also test to make sure that their backups are actually working, by periodically restoring and checking the backed-up files.


More and more individuals are also taking advantage of cloud-based backup services to store family photos, records and other files outside their homes -- and they'll want to check that those are effective, too.

 

 

 

Will Wayfair unleash state-by-state chaos?

By Roger Russell

 

The fallout from Wayfair continues – and the most recent development highlights the potential for the Supreme Court decision to unleash a patchwork of burdensome and confusing state sales tax rules.

 

The Colorado Department of Revenue announced on Sept. 11 that it will require out-of-state retailers who do business in Colorado to obtain a sales tax license.

 

The Department said the change is a result of the Supreme Court decision in South Dakota v. Wayfair, which struck down the requirement that a retailer have a physical presence in a state in order to be required to collect and remit sales tax.

 

“Tax collection at the point of sale eases the process for our residents and creates a level playing field for Colorado businesses, as out-of-state retailers will be required to collect state sales tax, just as in-state retailers do today,” said Colorado Department of Revenue executive director Michael Hartman.

 

Guidance for out-of-state retailers will be provided by administrative rule and will be consistent with the court’s decision, including prospective application and a small-seller exception for retailers whose in-state sales do not exceed $100,000 or 200 transactions annually.

 

“The Department will ensure fair, efficient and transparent implementation of this decision,” Hartman said. “We will pave the least burdensome road possible for businesses to comply with these regulations.”

 

Scott Peterson, vice president of U.S. tax policy and government relations at Avalara, and former executive director of the Streamlined Sales Tax Governing Board, was somewhat taken aback.

“Even though Colorado has been talking about this for years, I was surprised to see the state take this action, given how little has been done to reduce their complicated sales tax,” he said.

 

“A few years ago, when Congress seemed interested in giving states this kind of authority, the Colorado legislature enacted a law to take advantage of that authority,” he said. “The law was only going to apply to the state sales tax, with the option for local governments if they made the simplification changes then outlined in federal legislation.”

 

“Since Congress didn’t enact anything, this issue lay dormant until last year, when the state created a sales tax simplification task force. Members of that task force came from the legislature, industry, local government and the accounting industry,” Peterson said. “I presented at one of their meetings last year and thought they were making progress toward addressing the complexity that exists in their sales tax. I was wrong, but I thought the state would wait until more was accomplished.”

 

Despite the small-seller exception, which matches South Dakota’s exception, Colorado’s sales tax system is anything but simple.

 

“The problem with Colorado is that they allow their major home rule cities to basically come up with their own sales tax code, which doesn’t have to conform to the state,” said Marvin Kirsner, a shareholder at law firm Greenberg Traurig.

 

“Many states have passed or adopted similar rules,” he noted. “The $100,000-in-sales threshold for South Dakota may be reasonable because South Dakota has less than a million people, but there are states with far more. A lot of small merchants will be caught. In my own practice, I have seen medium-size business remote sellers, bigger than mom and pops, struggling to get ready in a short amount of time. Most of the state statutes have an effective date of Oct. 1, and some states are looking to enforce retroactivity. They’re counting on people not being able to hire attorneys and go through the state court systems.”

 

“Colorado’s sales tax system is a mess,” agreed Andrew Moylan, head of the National Taxpayers’ Union’s Interstate Commerce Initiative. “The problem is that they have a very inefficient and outdated system that would be unlikely to survive a legal challenge, even after the Wayfair decision.”

 

“They have hundreds of taxing jurisdictions. In effect, localities in Colorado are allowed to define and administer a sales tax completely independent from the state,” he explained. “They set their own base, their own rates, and audit separately. Previously it wasn’t an issue because they only imposed it on their own residents. But thousands of retailers across the country have sales there.”

 

“They cite the $100,000 threshold as if it gives them blanket authority, but the Supreme Court cited other features of South Dakota’s system, one of which is that South Dakota is a member of [Streamlined Sales Tax]. As a result, South Dakota has a system that is relatively easy to implement, and that’s clearly not the case with Colorado. It’s certain to bring litigation.”

Moylan believes a bipartisan bill will go a long way toward clearing up some of the mess in the wake of Wayfair. Rep. Jim Sensenbrenner, R-Wisconsin, joined Rep. Anna Eshoo, D-California, Rep. Zoe Lofgren, D-California, and Rep. Jeff Duncan, R-South Carolina to introduce the Online Sales Simplicity and Small Business Relief Act of 2018. It would ban retroactive taxation, delay implementation of hastily crafted post-Wayfair laws, and establish a small-seller exception of $10 million in sales.

 

“It can’t pass soon enough,” said Moylan. “Some states, like Florida, have threatened retroactive taxation. Michigan and North Carolina, among others, have plowed ahead with collection rules despite lacking a statutory basis for them. States like Washington and Pennsylvania seek to impose tax obligations on truly tiny businesses, for whom collecting sales taxes nationwide is a daunting and expensive prospect. And states like Colorado and Louisiana have moved ahead with schemes that are obviously unconstitutional in their scope and reach.”

 

Moylan believes the Sensenbrenner bill has a good chance of passing.

 

“It’s bipartisan, and it deals with important issues,” he said. “But it won’t be on the president’s desk next week. There are always forces aligned against bills like this.”

 

 

 

DOJ, FBI and SEC use new tools to combat fraud

By Michael Cohn

 

Officials from the Department of Justice, the Federal Bureau of Investigation and the Securities and Exchange Commission discussed some of the latest fraud trends and how they are combatting them during an Association of Certified Fraud Examiners fraud risk management summit in New York.

 

“It’s an unprecedented time in many respects with the rapidity with which fraudsters are leveraging and utilizing everything from the dark web to myriad schemes involving cryptocurrency and virtual currency,” said Sandra Moser, acting chief of the DOJ Fraud Section, during the summit last Friday.

 

Steve D’Antono, chief of the FBI’s Financial Crimes Section, said a big priority for his unit right now is opioid diversions to stem the flow of illegal prescription drugs and narcotics, and elder fraud abuse of vulnerable senior citizens. “Probably somebody in this room has been affected by the opioid and heroin epidemic at some point in time,” he said. “We’ve put in a big push with the DOJ and the AGs on opioid diversion. The 12 districts that we’re in right now are fighting the doctors overprescribing. This past year, indictments are way up. We had the biggest health care fraud takedown in history. We’ve also got a big elder abuse initiative going on right now.”

 

Last October, Congress passed the Elder Abuse Prevention and Prosecution Act, which mandates the Department of Justice and the FBI to focus more on deterring elder fraud, he pointed out.

 

Judith Weinstock, assistant regional director of the Securities and Exchange Commission’s New York Regional Office, noted that SEC enforcement is focused right now on violations that affect retail investors and is using data analytics to detect them. “For example, accounting fraud, sales of unsuitable products, and the pursuit of unsuitable trading strategies, pump and dump frauds, Ponzi schemes, just to name a few,” she added. “In 2018 the SEC formed the Retail Strategy Task Force. And that task force is using data analytics to identify specific areas of risk to retail investors.”

 

The SEC has also been investigating cybercrime with the help of data analytics. “The other big thing we’re looking at is cyber,” said Weinstock. “In 2018 the SEC formed a cyber unit to focus on cyber-enabled misconduct, including conduct on the dark web, such as brokering or selling stolen inside information paid for in untraceable cryptocurrency, market manipulation accomplished by hacking into the electronic accounts of others and then forcing the stock price to pump up, ICOs, market manipulation schemes spread through electronic and social media, cyber related threats to trading platforms, and cyber related threats to other critical market infrastructure. Like the Department of Justice and FBI, the SEC is using data analytics. Recently we announced we used data analytics to detect a cherry picking scheme. It was uncovered with the data used to detect suspicious trading patterns.”

 

The SEC’s Quantitative Analytics Unit has developed the National Exam Analytics Tool, or NEAT, to facilitate analysis of trading, she noted.

 

The DOJ’s Fraud Section has also been using technology to detect suspicious activity with cryptocurrency and other emerging technologies. “Just because you’re using something that sounds scary and complex to a lot of people, like a virtual currency, a scheme can be simple,” said Moser. “You can try to take someone’s money and do it by lying. That’s either wire fraud or mail fraud, but you’re doing it using virtual currency, so it’s not that complex of a scheme. Then there’s the other end of the spectrum where we’re really grappling to get our arms around understanding the very complex technological implications of how fraudsters are utilizing this sort of stuff.”

 

The DOJ, FBI and SEC are coordinating investigations to help uncover increasingly sophisticated forms of fraud.

 

“We, sitting as prosecutors at DOJ in Washington, or anywhere out in the field, don’t have access at our fingertips to all that complexity, and we don’t have access at our fingertips to the expertise to understand it, much less dismantle longstanding schemes,” said Moser. “So a major priority is working and collaborating with our regulator and agency partners to make sure that we are being as efficient as we can about getting access to the data and then taking an efficient and systematic approach, by educating ourselves as to migrating and leveraging that data to see what sort of themes that we can discern in terms of prosecuting fraud.”

 

 

 

Lawmakers want guidance from IRS on taxation of cryptocurrency

By Michael Cohn

 

House Ways and Means Committee Chairman Kevin Brady, R-Texas, and other Republicans on his committee have sent a letter to the Internal Revenue Service asking for more detailed guidance for taxpayers about virtual currencies such as Bitcoin and Ethereum.

 

In 2014, the IRS issued guidance on virtual currencies in Notice 2014-21 in the form of frequently asked questions, including information that the IRS would treat digital currency as property for tax purposes. IRS Commissioner John Koskinen later referred to it as “preliminary guidance.” But since that time the agency has posted no official updates or guidance, despite calls from Congress and groups such as the American Institute of CPAs asking for more information. The IRS has undertaken significant enforcement actions towards taxpayers who use virtual currencies, including a John Doe summons against users of the popular Bitcoin exchange Coinbase.

 

“While the issues surrounding virtual currencies are complicated and ever evolving, a key component of the IRS’s duties as the nation’s tax administrator is to assist taxpayers in understanding what their tax obligations are and how they may best meet them,” Brady and his colleagues wrote in a letter Wednesday to IRS acting commissioner David Kautter. “A failure to put forth adequate guidance severely hinders taxpayers’ ability to do so. The IRS has had four years to work through these issues since its preliminary guidance was issued, providing more than adequate time for the IRS to thoughtfully consider what additional information is needed.”

 

The letter follows an earlier letter sent to the agency in May 2017 from Brady, then-Oversight Subcommittee Chairman Vern Buchanan, R-Florida, and Senate Finance Committee Chairman Orrin Hatch, R-Utah, asking questions about IRS enforcement actions against individuals virtual currency holders like those in the Coinbase summons.

 

Brady and his colleagues — Ways and Means Oversight Subcommittee Chairman Lynn Jenkins, R-Kansas, Rep. David Schweikert, R-Arizona, Darin LaHood, R-llinois, and Rep. Brad Wenstrup, R-Ohio — pointed out in Wednesday’s letter the IRS used its John Doe Summons authority to seek the records of approximately half a million Americans who held virtual currencies between 2013 and 2015. Then on July 2, 2018, the IRS’s Large Business and International division announced five new compliance campaigns, one of which focuses on non-compliance related to virtual currencies.

 

“At the same time, the IRS also announced that it would not be providing leniency for taxpayers by allowing for a voluntary disclosure program to address tax non-compliance related to virtual currencies,” they wrote. “The IRS has also sought to remind taxpayers of the penalties for non-compliance with its preliminary guidance. In March 2018, the IRS reminded taxpayers that those who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and held liable for penalties and interest. In more extreme situations, taxpayers can be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions.”

 

Brady and his colleagues expressed concern about the IRS’s enforcement efforts in the absence of much guidance. “While the Committee appreciates the IRS’s need to undertake enforcement actions to ensure that taxpayers generally meet their tax obligations, in this case, we are concerned that the IRS is seeking to enforce guidance that does not adequately advise taxpayers of their tax obligations when using virtual currencies,” they wrote. “Furthermore, while the issues surrounding virtual currencies are complicated and ever evolving, a key component of the IRS’s duties as the nation’s tax administrator is to assist taxpayers in understanding what their tax obligations are and how they may best meet them. A failure to put forth adequate guidance severely hinders taxpayers’ ability to do so. The IRS has had four years to work through these issues since its preliminary guidance was issued, providing more than adequate time for the IRS to thoughtfully consider what additional information is needed.”

 

They noted that the Association of International Certified Professional Accountants, the American Bar Association and other organizations have all raised concerns, citing the need for additional clarity through updated guidance.

“We therefore strongly urge the IRS to expeditiously issue more robust guidance clarifying taxpayers’ obligations when using virtual currencies,” said the lawmakers. “In addition, we will be asking the Government Accountability Office to undertake an audit on this matter.”

 

 

 

IRS pushes back major W-4 changes until 2020

By Michael Cohn

 

The Treasury Department said Thursday the Internal Revenue Service would push back implementation of a redesigned Form W-4 to tax year 2020, allowing the agency to keep working on a new approach to the employee withholding form.

 

The IRS released a draft version of a new Form W-4, "Employee’s Withholding Allowance Certificate," earlier this year in the wake of the Tax Cuts and Jobs Act, but it received heavy criticism from groups like the American Institute of CPAs and the National Association of Enrolled Agents, which said it raised privacy concerns, created a substantial risk of underwithholding, and would require taxpayers to forecast a number of tax-related items that are traditionally difficult to predict (see AICPA wants IRS and Treasury to simplify Form W-4 and NAEA sees lots of problems with new Form W-4).

 

After enactment of the Tax Cuts and Jobs Act last December, the Treasury and the IRS began making extensive changes to the wage withholding system and Form W-4, "Employee’s Withholding Allowance Certificate." The new tax law eliminates personal exemptions, doubles the standard deduction and changes tax brackets, among other extensive revisions to the Tax Code. In June, the IRS released a draft version of a redesigned form for public comment and received many suggestions for improvements, which the agency is working to incorporate in the form to be released for tax year 2020.

 

“The Treasury and IRS are working diligently to implement the most comprehensive tax legislation in more than 30 years,” said Treasury Secretary Steven Mnuchin in a statement. “Launching the redesigned form in 2020 will allow the Treasury and the IRS to properly implement changes to the withholding system and ensure taxpayers have a positive and simplified experience.”

 

For tax year 2019, the IRS will instead release an update to the Form W-4 that’s similar to the 2018 version currently in use. That 2019 form will be released in the coming weeks according to the usual practice for annual updates.

 

The Treasury and IRS plan to continue working closely with the tax and payroll community as they make further changes to the Form W-4 for 2020 in hopes the upcoming revisions will make the withholding system more accurate and transparent to employees. The IRS intends to release the 2020 form and the relevant guidance and information early enough in 2019 to give employers and payroll processors sufficient time to update their systems.

 

 

 

Internal GOP poll: ‘We’ve lost the messaging battle’ on tax cuts

By Sahil Kapur and Joshua Green

 

A survey commissioned by the Republican National Committee has led the party to a glum conclusion regarding President Donald Trump’s signature legislative achievement: Voters overwhelmingly believe his tax overhaul helps the wealthy instead of average Americans.

By a 2-to-1 margin — 61 percent to 30 percent — respondents said the law benefits “large corporations and rich Americans” over “middle class families,” according to the survey, which was completed on Sept. 2 by the GOP firm Public Opinion Strategies and obtained by Bloomberg News.

 

The result was fueled by self-identified independent voters who said by a 36-point margin that large corporations and rich Americans benefit more from the tax law — a result that was even more lopsided among Democrats. Republican voters said by a 38-point margin that the middle class benefits more.

 

When it comes to approval for the tax overhaul, American voters remain torn — 44 percent favor it and 45 percent oppose it.

 

“Voters are evenly divided on the Tax Cuts and Jobs Act,” the RNC-commissioned report said. “But, we’ve lost the messaging battle on the issue.”

 

The tax law slashed the corporate tax rate permanently to 21 percent from 35 percent. It also reduced individual tax rates, doubled the standard deduction, eliminated or capped some itemized deductions, most notably for state and local taxes, and created a special break for pass-through businesses like partnerships until the end of 2025. That year, 25 percent of the gains will go to the top 1 percent while 66 percent of the benefits will go to the top one-fifth of earners, according to an analysis from the Urban-Brookings Tax Policy Center.

 

Taxes are reduced on average for all quintiles of Americans through 2025, although some would pay more due to the limitation of tax deductions. By 2027, after the individual changes have sunset, 83 percent of the benefits will go to the top 1 percent.

 

Trump signed the law on Dec. 22, after it passed Congress without a single Democratic vote.

The RNC study says Americans worry the tax law will lead to cuts in Social Security and Medicare, concluding that “most voters believe that the GOP wants to cut back on these programs in order to provide tax breaks for corporations and the wealthy.” It attributes that finding to “a fairly disciplined Democrat attack against the recent tax cuts.”

 

Tax Cuts 2.0

Still, Republican leaders continue to try to sell the law. They’re planning on holding a floor vote in the House next week for a second phase of tax changes that would make the individual changes permanent. Since it has a slim chance of passing the Senate, the effort is seen as a political messaging tool to remind voters of the cuts and force Democrats to take an uncomfortable vote against tax relief for middle-class Americans.

 

“We promised more jobs, fairer taxes, and bigger paychecks. And we delivered on that promise,” House Speaker Paul Ryan’s office said in an email, adding that Americans are “better off now” under the tax changes.

 

A spokeswoman for the RNC didn’t immediately respond to a request for comment.

The GOP poll comes nine months after party leaders voiced high hopes that the tax law would benefit them politically in the midterm elections on Nov. 6, when control of Congress will be up for grabs.

 

“If we can’t sell this to the American people, we ought to go into another line of work,” Senate Majority Leader Mitch McConnell said in December, after his chamber approved the legislation.

 

 

 

How to improve upon last year's tax reform

By Karl W. Smith

 

Although the White House now acknowledges that Republicans will not be able to pass a second round of tax cuts before the midterm elections, House Speaker Paul Ryan has promised a vote on so-called Tax Reform 2.0 before then. But even if the politics are unsettled, the policy shouldn’t be.

 

Whether Tax Reform 2.0 is the first salvo in a protracted battle over tax policy or just an election-year gambit, this is a debate that cannot be avoided. New legislation will have to be passed to make many aspects of last year’s Tax Cuts and Jobs Act permanent. (The sunset provision, under which many features of the law change or expire in several years, was a gimmick designed to lower its impact on the budget deficit.)

 

The Tax Cuts and Jobs Act contained three essential elements, two of which substantially strengthened the U.S. Tax Code and should be made permanent under any reform. The third one did not and should not.

 

The first two elements are the changes to the corporate and individual tax codes. America’s corporate tax rate is now commensurate with those of America’s economic peers, making the U.S. more competitive globally, and a change in the expensing of capital purchases will encourage investment. The individual code, meanwhile, has been simplified, and an increase in the standard deduction is essentially a tax cut for millions of Americans.

 

Together these two elements give U.S. businesses and taxpayers stronger incentives to save and invest. If made permanent, the Tax Foundation estimated last year, they could increase the total amount of capital invested in the U.S. economy by 12 percent.

 

The third element is the creation of a major new loophole in the form of large deductions for what are known as pass-through entities. These are essentially business structures, such as limited-liability corporations, that allow the owners to avoid paying corporate taxes and instead have their corporate profits added to their individual tax liability.

 

This kind of structure makes sense for sole proprietorships and other small businesses. Increasingly, however, driven in part by the U.S.’s relatively high corporate tax rate, it had been used by midsized and large businesses. Part of the rationale for lowering the corporate rate was to remove some incentive to form pass-through entities.

 

Unfortunately, the Tax Cut and Jobs Act also created a whole new incentive to classify a business this way. Under the law, an individual can claim a 20 percent tax deduction for any income classified as business income. That means high earners such as celebrities, financial professionals and surgeons have an incentive to form LLCs and claim this deduction, even when their services more closely resemble those of an employee rather than an entrepreneur.

 

It’s not as if members of Congress couldn’t have seen this coming. When Kansas included a similar loophole in its tax reform in 2012, it saw a 20 percent increase in the number of pass-through entities. This led to a $300 million decline in revenue, and Kansas officials essentially rescinded their tax reform in 2017.

 

Lowering marginal tax rates and encouraging investment are worthwhile goals. But the creation of a large pass-through deduction undermines those efforts, creating a tax loophole that is largely unavailable to middle-class taxpayers. It narrows the tax base, reduces long-term revenue projections and undermines the efficiency gains from the reform if the individual tax code.

 

As members of Congress consider tax reform — regardless of whether they actually vote on it — they should keep these larger goals in mind: reduce complexity and encourage economic growth. The pass-through deduction does neither.

 

 

 

Top tax strategies for the end of the year

By Roger Russell

Even though the Tax Cuts and Jobs Act has been with us for nearly a year, most taxpayers still aren’t aware of the steps they should take between now and year’s end to improve their position. By taking appropriate measures, it is possible to maximize the benefits and minimize the burdens under the new law. The issues aren’t the same as last year, when no one knew what the tax landscape would be after the first of the year. The issue now is that much is new, and more complex. 

To increase the likelihood of a “pleasantly surprised” taxpayer come tax season, a number of experts shared what they would advise doing between now and year’s end. Here are their suggestions.

 

Fine-tune the W-4

Revise W-4s before year-end to more closely match remaining withholding for the year to expected tax obligations. The savings that taxpayers anticipate might have already been given to them through withholding. If they’ve been receiving a bigger paycheck, it won’t be there -- or worse, they may owe money.

 

Look at pay in pass-throughs

 

If a small-business client is eligible for the 20 percent deduction for pass-through entities, determine whether there are any changes in the compensation structure they can make that will maximize the deduction.

 

Recapturing AMT

With the new higher income limits for individuals exposed to the Alternative Minimum Tax, more taxpayers will have the opportunity to recapture the AMT paid in prior years. Tax professionals can calculate prior years’ AMT credit now and the taxpayers affected can reduce their withholding and enjoy the benefit early.

 

Always, always, always save

 

Maximize retirement plan contributions before year end. This is a perennial suggestion, as far too many taxpayers fail to make the most of their 401(k)s and other savings accounts.

 

Loss harvesting

Sell stocks that may produce a loss. Taxpayers can deduct up to $3,000 ($1,500 for married filing separately) of their excess losses, which reduces overall income. If the taxpayer sold stocks that resulted in a gain, selling stocks that produce a loss will offset the gain.

 

Clean out FSAs

Review flexible spending accounts to determine if the account balance can be used before the plan’s deadline. Funds not used by the account deadline will be lost, so taxpayers need to schedule medical appointments, buy new glasses or buy health care items covered by FSA.

 

Build that cryptocurrency paper trail

Advise clients who buy, sell or mine cryptocurrency to get accurate records in order. Taxpayers without accurate records could be subject to higher-than-normal gains.

 

Check out 'reasonable comp' rules

Make sure an S corporation owner’s salary meets the “reasonable compensation” standard – what they would need to pay someone else to do the job they do. If they have not taken a salary, they should do so by the end of the year.

 

Managing itemizing

Compare reduced itemized deductions to which the taxpayer might be entitled this year to the new standard deduction. If they won’t benefit from increasing itemized deductions such as charitable contributions (because the standard deduction will be greater), they can consider bunching charitable contributions into every other year, setting up a donor-advised fund, or, if over 70-1/2, making charitable contributions through IRA distributions. If they are taking the deduction this year, they can add to it by cleaning out closets, dressers, and storage areas and donating unused items to charitable organizations such as Amvets, Goodwill, and the Salvation Army.

 

Hit in the high-tax states

Those subject to the $10,000 deduction cap on state and local taxes, they should preserve real estate tax deductions by allocating to a business return whenever possible.

 

Insurance issues

 

Enhance insurance coverage due to the loss of personal casualty and theft-loss deductions that are not part of federally declared disasters.

 

Get some big wheels

Buy an SUV or truck that is heavier than 6,000 pounds for a business to take bonus depreciation up to 100 percent of the cost of the vehicle.

 

Go for a cost-seg study

If the client has purchased or is purchasing real estate by year’s end to rent out or use in business, do a cost segregation study so they can capture the bonus depreciation on land improvements and contents of the building.

 

Pick the right date to split

If client is in the middle of a divorce, finalize the divorce before the end of 2018 so they will be able to deduct alimony paid to their spouse. If client will be the recipient of the alimony, they might want to put off finalizing the divorce or cut a deal to increase payment – after 2018 they won’t pay tax on the alimony.

 

Special thanks to Sheila Clark, director of The Income Tax School, Tynisa Gaines, assistant director of The Income Tax School; Roger Harris, president of Padgett Business Services; Mark Luscombe, principal federal tax analyst for Wolters Kluwer; Mike McCarthy, principal at Rehmann; Cathy Mueller, director of operations for Peoples Income Tax; Tom Wheelwright, chief executive of WealthAbility; and Beanna Whitlock, a San Antonio-based practitioner and educator and former IRS director of National Public Liaison

 

 

 

IRS updates per diem rates for business travel expenses

By Michael Cohn

 

The Internal Revenue Service issued its annual notice Wednesday describing the daily rates that taxpayers can use for lodging, meals and incidental expenses when traveling for business.

 

Notice 2018-77 announces the special per diem rates, effective Oct. 1, 2018, that taxpayers may use to substantiate the amount of expenses for lodging, meals and incidental expenses when traveling away from home. The notice also provides the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.

 

The special meal and incidental expense rates for taxpayers in the transportation industry are $66 for the continental United States and $71 for travel outside the continental U.S. The rate for any locality of travel for the incidental expenses only deduction is $5 per day.

 

For purposes of the high-low substantiation method, the per diem rates are $287 for travel to a high-cost locality and $195 for travel to any other locality within the continental U.S. The amount of the $287 high rate and $195 low rate that is treated as paid for meals is $71 for travel to any high-cost locale and $60 for travel to any other locality within the continental U.S.

 

The per diem rates in lieu of the rates for the meal and incidental expenses only substantiation method are $71 for travel to any high-cost locality, and $60 for travel to any other locale within the continental U.S. The notice includes a list of cities considered to be high-cost localities where the federal per diem rate is $241 or more.

 

 

 

10 CELEBRITIES WHO WERE GUILTY OF TAX EVASION

https://www.libertytax.com/tax-lounge/ten-celebrities-who-were-guilty-of-tax-evasion/

By Liberty Tax

 

As we learned in a blockbuster superhero film, with great power comes great responsibility. Yet while celebrities often make far more money than the average American, they’re not necessarily better at handling it responsibly. Throughout the years, a number of famous people have owed money to the IRS, and they learned the hard way that being famous didn’t help them dodge the consequences of tax evasion.

 

  1. Martha Stewart

Besides spending five months in jail for insider trading, Martha Stewart also had to pay for back state taxes owed for the income she earned in 1991 and 1992. Stewart argued she didn’t have to pay these taxes because at the time she didn’t live in the state of New York for more than half the year. Her argument was based on the fact that she also spent time at her home in Connecticut. The judge did not agree and made her pay more than $220,000 in taxes and penalties.

 

  1. Nicolas Cage

A famous Hollywood actor, producer, and director, Nicolas Cage has acted in 86 films, including City of Angels, The Rock, and Face Off. Some argue that the reason he’s been in so many films is to pay off his debt to the IRS. In 2002, he owed $13 million in federal income taxes. That same year, he paid off roughly half his debt by selling off a castle in Bavaria, a 67-million-year-old dinosaur skull, and properties in California and New Orleans.

 

  1. Willy Nelson

Due to shady practices employed by his accounting firm, Willy Nelson owed a whopping $16.7 million to the IRS, including interest and penalties. At one point, the IRS seized most of his possessions when he couldn’t pay back his tax bill. Eventually, Nelson ended up recovering when he sued the accounting firm and won, his lawyers negotiated his tax bill down to $6 million, and he put out an album titled “The IRS Tapes: Who’ll Buy My Memories?” The IRS got most of the sales, which totaled more than $3.6 million.

 

  1. Wesley Snipes

Wesley Snipes and his accountants and lawyers all spent time in prison for tax evasion. Snipes owed more than $15 million in taxes for income he earned between 1999 and 2001. Snipes maintained that his lawyers and accountants insisted he didn’t owe for these earnings. Regardless, he spent three years in prison followed by some time under house arrest.

 

  1. Chuck Berry

In 1979, Chuck Berry spent four months in prison for $110,000 in taxes he owed. In addition to tax evasion, he was charged with filing false tax returns. The rock star could have had it much worse, however. Based on his crimes, the IRS could have imprisoned him for up to 11 years and charged him more than $20,000 in fines.

 

  1. Darryl Strawberry

In addition to drug charges and domestic abuse, baseball star Darryl Strawberry was also found guilty of tax evasion. Strawberry pleaded guilty in 1995, admitting he had failed to report $350,000 in income earned through appearances and autograph signings between 1986 and 1990. Ultimately he owed more than $100,000 in back taxes and penalties.

 

  1. Richard Hatch

After winning the first season of CBS’s Survivor, reality star Richard Hatch was found guilty of trying to evade taxes and filing a false tax return that was supposed to include his $1 million prize from the show. Ultimately he spent 51 months in prison. However, originally he was charged with 10 tax-related crimes, which could have landed him almost 50 years in jail.

 

  1. Toni Braxton

This singer can’t seem to get her finances figured out. Braxton filed bankruptcy both in 1998 and 2010. The second time, experts estimated her net worth at $10 million, but she owed $50 million to her creditors, including almost $400,000 to the IRS. She did manage to pay off this IRS debt, but a few years later in 2018, Braxton again owed the IRS more than $550,000 in back taxes for income earned in 2015 and 2016.

 

  1. Joe Francis

Girls Gone Wild creator Joe Francis claimed his accountant messed up his tax returns. However, the same person informed the IRS of Francis’ fraud after leaving the accounting firm. Francis ended up paying $250,000 to the IRS in 2009 after being indicted for evading taxes in 2007.

 

  1. Marc Anthony

Singer Marc Anthony, Jennifer Lopez’s former hubby, has been in trouble for failing to pay taxes multiple times. In 2007, he owed $2.5 million in unpaid taxes to the IRS. In 2010, he received two separate tax liens for not paying taxes on his Long Island estate that totaled $3.4 million. He found out the hard way that you can divorce a spouse, but you can’t separate yourself from the IRS.

  

The moral of this story is simple: no matter how powerful, famous, or rich you may be, you can’t evade paying taxes. If you try, be prepared to pay fines and maybe even the ultimate penalty — serving jail time.

 

 

 

Reassuring clients about crooked preparers

By Jeff Stimpson

 

More than half of U.S. taxpayers use a paid preparer according to the IRS – the same agency that year after year ranks preparer fraud high on its annual list of headline tax crimes. What to tell jittery clients?

 

“In Connecticut, we’ve had some arrests of fraudulent preparers and clients bring that up in passing. In the past 18 years, no one has ever questioned my standing but often wonder why and how people do it,” said Morris Armstrong, an Enrolled Agent and registered investment advisor with Armstrong Financial Strategies, in Cheshire, Connecticut. “Signs that I tell them may be a trigger are very high refunds, very high fees and of course their telling you what you should deduct.”

 

“Many clients share stories about friends and relatives getting screwed by tax professionals, both licensed and unlicensed alike. I reassure clients by inviting them into my house, showing them how I live and that I chose to use my tax knowledge protecting others,” said John Dundon, an EA and president of Taxpayer Advocacy Services in Englewood, Colo.

 

“Over the years, I’ve had new clients come to me, and when I compare the current year with the prior year there are major differences, especially with Schedule A deductions,” said preparer Andrew Piernock at Piernock Accounting and Tax Services in Philadelphia. “I explain to the new client that the prior year has major issues and in the event of an audit they should have the backup to support those deductions. I reassure them that I do everything by the book and I am not putting their return and my business and reputation in jeopardy.”


Someone else’s mess

Preparers report that a sometimes-small but growing number of clients express concern and that new preparers must often first clean up messes before assuring taxpayers.

 

“The taxpayer pays them a high preparation fee, gets a big refund, but often has to pay it back with interest and penalties. I’ve found these crooked preparers often prey on low-income and minority populations,” said Patrick O’Hara, an EA with the Tax Alternative Group in Poughkeepsie, N.Y. “It’s unfortunate that taxpayers seem to have more confidence in the unscrupulous preparer who promises big refunds than the licensed professional who says, ‘That’s not allowed…’”

 

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“I had a representation client come to me after dealing with an abusive preparer. In fact, he went so far as to send out letters telling his clients that the IRS may come calling and he did nothing more than put what they told him on the return,” recalled Helen O’Planick, an EA at HELJAN Associates in Manchester, Pennsylvania. “Well, mileage was commuting and expenses were not deductible – pantyhose and manicures for a teacher? Did he tell them that? No.”

 

“I haven’t had much experience with this issue in the past [but] during this past tax season we took on a new client who never got their refund last year and their old preparer just isn’t being straightforward,” said Marilyn Heller Ayers, a CPA in Brick, N.J. “They’re an older couple living on a fixed income and the refund was nearly $2,500.”

 

Is the blame always entirely the former preparer’s? “While I feel sorry for the taxpayers who have been impacted, I also suspect that in many cases that they’re complicit. You know that you only have two kids and that you don’t have a business – let alone a business that generates a $20,000 loss,” Armstrong said.


No ‘coordinated strategy’

The Treasury Inspector General for Tax Administration recently reported (https://www.taxprotoday.com/news/irs-faulted-by-inspector-general-for-efforts-to-deter-tax-preparer-misconduct) that the IRS lacks a coordinated strategy to deal with unregulated tax preparers. The report pointed out that because IRS efforts to regulate preparers were invalidated by litigation, preparers are generally unregulated and they can prepare returns with no formal training or education -- not to mention extensive evidence that some prey on innocent taxpayers.

“A few years ago a tax preparer falsified deductions and embezzled funds of clients. We inherited a few of her clients, so we had first-hand knowledge from prior returns,” said preparer Eric Hansen in Omaha, Nebraska. “Her story was locally publicized and the IRS was informed. The IRS did nothing. Hard to reassure clients when the IRS amazingly allows this preparer to continue doing tax returns.”

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The TIGTA report comes amid a fresh legislative effort to regulate preparers: the bipartisan Protecting Taxpayers Act, which includes a number of reforms to the IRS, including statutory authority to regulate paid preparers “in a balanced way.”

 

Some preparers try to educate clients. “I tell everyone every time and include scam warnings in Facebook promo material and still some don’t get the message. But most are saying they know about it,” said Paul Knapp of Exact Income Tax Service, in Santa Fe.

 

Kathryn Morgan, an EA at Puzzled by Taxes in Haughton, Louisiana, clarifies for clients the difference between a tax preparer and a tax professional. “Tax preparer: someone who prepares an income tax return for another,” she said. “Tax professional: a trained professional who maintains continuous education to update their knowledge and then uses that knowledge to assist a taxpayer in completing a thorough and accurate income tax return resulting in the lowest legal tax liability for the taxpayer.”

 

Kerry Freeman, an EA at Freeman Income Tax Service in Anthem, Arizona, has every client sign an engagement letter in which he explains “not only the client’s responsibility but my protections for them and the remedies afforded them,” he said.


Trust

“When they tell me about crooked tax preparers, they always say that’s why they come to me because they trust me,” said Kathy Hawboldt of Hawboldt’s Tax Service, in Louisville, Kentucky.

 

“They’re usually telling us that they are glad they don’t have to worry.” added Marilyn Meredith at Michigan-based Meredith Tax Service.

 

“Several of my clients have personal experiences with either crooked preparers or ones that just really don’t know what they’re doing. I think the work that I do and my reputation is reassurance for them,” said EA Laurie Ziegler at Sass Accounting in Saukville, Wisconsin. “About 80 percent of my new clients come from referrals. Current clients wouldn’t be sending their friends and/or relatives to me if they didn’t trust me themselves.”

 

“I prepare approximately 450 returns a year. This is my 19th year, and I can safely say that I’ve only heard that concern from less than 10 clients,” said Frederick Reynolds, an EA in Utica, N.Y. “I put those with a concern at ease by telling them that I work for a reputable national tax company and that I’m an EA and am held to high preparation standards.”

 

“So the client asked me how she knew she could trust me. I explained that I was licensed by the IRS and was in business 15 years (at that time). And I had a good rep with the IRS. That worked, and I’m still doing her taxes eight years later. And yes, we did fix the issue with the bad preparer,” Pennsylvania’s O’Planick said.

 

Is that enough?

 

“Anyone can do illegal things and it doesn’t matter if you are a non-enrolled preparer, a CPA or an EA,” Armstrong added. “Those measure education achievements and hold you to various standards. The best measure is someone who is full-time and has been around for quite a few years. Credentials don’t make anyone ethical. It’s much deeper than that.”

 

 

 

Are You a Member of the Sandwich Generation?

 

If you’re currently taking care of your children and elderly parents, count yourself among those in the “Sandwich Generation.” Although it may be personally gratifying to help your parents, it can be a financial burden and affect your own estate plan. Here are some critical steps to take to better manage the situation.

 

Identify key contacts

Just like you’ve done for yourself, compile the names and addresses of professionals important to your parents’ finances and medical conditions. These may include stockbrokers, financial advisors, attorneys, CPAs, insurance agents and physicians.

 

List and value their assets

If you’re going to be able to manage the financial affairs of your parents, having knowledge of their assets is vital. Keep a list of their investment holdings, IRA and retirement plan accounts, and life insurance policies, including current balances and account numbers. Be sure to add in projections for Social Security benefits.

 

Open the lines of communication

Before going any further, have a frank and honest discussion with your elderly relatives, as well as other family members who may be involved, such as your siblings. Make sure you understand your parents’ wishes and explain the objectives you hope to accomplish. Understandably, they may be hesitant or too proud to accept your help initially.

 

Execute the proper documents

Assuming you can agree on how to move forward, develop a plan incorporating several legal documents. If your parents have already created one or more of these documents, they may need to be revised or coordinated with new ones. Some elements commonly included in an estate plan are:

 

Wills. Your parents’ wills control the disposition of their possessions, such as cars, and tie up other loose ends. (Of course, jointly owned property with rights of survivorship automatically pass to the survivor.) Notably, a will also establishes the executor of your parents’ estates. If you’re the one providing financial assistance, you may be the optimal choice.

 

Living trusts. A living trust can supplement a will by providing for the disposition of selected assets. Unlike a will, a living trust doesn’t have to go through probate, so this might save time and money, while avoiding public disclosure.

 

Powers of attorney for health and finances. These documents authorize someone to legally act on behalf of another person. With a durable power of attorney, the most common version, the authorization continues after the person is disabled. This enables you to better handle your parents’ affairs.

 

Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. Make sure that your parents’ physicians have copies, so they can act according to their wishes.

 

Beneficiary designations. Undoubtedly, your parents have completed beneficiary designations for retirement plans, IRAs and life insurance policies. These designations supersede references in a will, so it’s important to keep them up to date.

 

Spread the wealth

If you decide the best approach for helping your parents is to give them monetary gifts, it’s relatively easy to avoid gift tax liability. Under the annual gift tax exclusion, you can give each recipient up to $15,000 (for 2018) without paying any gift tax. Plus, payments to medical providers aren’t considered gifts, so you may make such payments on your parents’ behalf without using any of your annual exclusion or lifetime exemption amount.

 

Mind your needs

If you’re part of the Sandwich Generation, you already have a lot on your plate. But don’t overlook your own financial needs. Contact us to discuss the matter further.

 

 

 

IRS updates per diem rates for business travel expenses

By Michael Cohn

 

The Internal Revenue Service issued its annual notice Wednesday describing the daily rates that taxpayers can use for lodging, meals and incidental expenses when traveling for business.

Notice 2018-77 announces the special per diem rates, effective Oct. 1, 2018, that taxpayers may use to substantiate the amount of expenses for lodging, meals and incidental expenses when traveling away from home. The notice also provides the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.

 

The special meal and incidental expense rates for taxpayers in the transportation industry are $66 for the continental United States and $71 for travel outside the continental U.S. The rate for any locality of travel for the incidental expenses only deduction is $5 per day.

 

For purposes of the high-low substantiation method, the per diem rates are $287 for travel to a high-cost locality and $195 for travel to any other locality within the continental U.S. The amount of the $287 high rate and $195 low rate that is treated as paid for meals is $71 for travel to any high-cost locale and $60 for travel to any other locality within the continental U.S.

 

The per diem rates in lieu of the rates for the meal and incidental expenses only substantiation method are $71 for travel to any high-cost locality, and $60 for travel to any other locale within the continental U.S. The notice includes a list of cities considered to be high-cost localities where the federal per diem rate is $241 or more.

 

 

 

IRS offers guidance on meals and entertainment deduction after tax reform

By Michael Cohn

 

The Internal Revenue Service released guidance Wednesday on the business expense deduction for meals and entertainment in the wake of the Tax Cuts and Jobs Act, which was supposed to eliminate deductions for expenses pertaining to activities generally considered entertainment, amusement or recreation.

 

The IRS said taxpayers can still deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the business) is present at the meal, and the food or beverages aren’t considered to be “lavish or extravagant.” The meals can involve a current or potential business customer, client, consultant or a similar business contact. Food and beverages provided during entertainment events won’t be considered entertainment if they’re bought separately from the event.

 

Before 2018, a business was able to deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if they’re incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business. That changed, however, with the passage of the tax code overhaul last December.

 

Section 274 of the tax code now generally disallows a deduction for expenses with respect to entertainment, amusement or recreation after passage of the new tax law. However, the Tax Cuts and Jobs Act doesn’t specifically address the deductibility of expenses for business meals.

 

The Treasury Department and the IRS plan to publish proposed regulations that will clarify exactly when business meal expenses are deductible and what constitutes entertainment. Until those proposed regulations take effect, taxpayers can rely on guidance in Notice 2018-76, which the IRS issued Wednesday in conjunction with the announcement.

 

 

 

You can still deduct a client's meal on a night out, IRS says

By Laura Davison and Lynnley Browning

 

The Internal Revenue Service is giving businesses a tax break they thought they had lost in the tax overhaul last year — write-offs for wining and dining clients.

The agency said Wednesday companies can still deduct 50 percent of meals while entertaining clients and customers, clearing up confusion about whether tax law changes last year had completely eliminated that benefit.

 

The bill that President Donald Trump signed eliminated the deduction for so-called entertainment expenses — golf outings, cruises and concert tickets. Tax professionals also thought that ban included food purchased while taking clients out. The IRS said the costs of business meals while entertaining clients are still deductible as long as they’re reflected on a separate receipt.

 

“Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event,” the IRS said in a statement.

 

For example, a meal purchased after a round of golf could be deducted. But tickets to a box to view a sporting event that includes food and drink would not be eligible for the tax break.

 

The clarification comes after trade groups, such as the American Institute of CPAs, urged the agency to clear up the uncertainty. The institute, which formed a meal and entertainment task force, asked for clarification on client business meals separate from entertainment events as well as those before, during or after entertainment events.

 

Kathy Petronchak, the director of IRS practice and procedure at alliantgroup and the chair of the meals and entertainment task force at the CPA group, said that the guidance and examples “align with what we had hoped to see with the clear distinction between entertainment and allowable business expenses for meals.”

 

The IRS issued preliminary guidance Wednesday, and said it would follow up with more formal regulations in the future.

 

 

 

 

The ‘Nexus Monday’ blues

By Roger Russell

 

“Nexus Monday” – the date on which the economic nexus laws of 10 states came into effect – was Oct. 1, 2018. But just in case some businesses didn’t get the message, a number of states sent little reminders to online retailers that might be affected.

 

“Somehow, somewhere, there is a list that all these states have that they are using to send letters to online retailers,” said Scott Peterson, former executive director of the Streamlined Sales Tax Project and currently vice president of U.S. tax policy and government relations at Avalara. “Otherwise, how would one company, one of our customers, get letters from three states, almost in the same day, reminding them of the date that the state expected that company to start collecting sales tax? I don’t know how they got the list or where it came from, but we’re seeing the logical outcome of these economic nexus laws being passed.”

 

By the end of the year, 28 states will have passed economic nexus laws, and Peterson expects such laws to be in every state by July 1, 2019.

 

All 10 states whose laws went into effect on Oct. 1 have a threshold modeled after that of South Dakota’s $100,000/200 transaction threshold that the Supreme Court assented to in Wayfair. Those states are: Alabama, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, North Dakota, Washington and Wisconsin.

 

https://assets.sourcemedia.com/dims4/default/1282cce/2147483647/resize/680x%3E/quality/90/?url=https%3A%2F%2Fassets.sourcemedia.com%2Ffd%2F2e%2Fde4b30e0454cb9e722b2240e87f4%2Fat-100218-nexuslaws-1.png

But there are issues with larger states using the same threshold, according to Peterson.

 

“When they were defending the $100,000 threshold in the brief they submitted to the Supreme Court, South Dakota estimated that a company selling $100,000 within the state was a $30 million company [i.e., would sell $30 million nationwide],” said Peterson. “But South Dakota has 800,000 people. Logically, if State X has three times that number, its threshold should be three times larger.”

 

“And what about Illinois, with 12 million people?” Peterson asked. “It put into place the same small seller threshold that South Dakota did.”

 

John Biek, co-chair of the taxation practice group at Chicago-based law firm Neal Gerber & Eisenberg, agreed.

 

“Illinois arguably should have imposed a higher gross receipts or transactional threshold than the South Dakota standard because it is a more populous and commercial state than South Dakota,” said Biek. “But the constitutional question of whether the Illinois nexus statute unduly burdens interstate commerce will have to be resolved in further litigation.”

 

“Retailers should expect state agencies to be more aggressive in asserting that out-of-state taxpayers have nexus for state sales, use and income tax purposes,” added Eric McLimore, an associate in NG&E’s taxation practice group.

 

“Once every state has a threshold, we should be able to take the individual thresholds and calculate a nationwide definition of a ‘small seller,’” Avalara’s Peterson said.

 

“For CPAs that advise small sellers, there are only a few steps that must be taken, but the challenge is that a couple of steps are time-consuming,” he said. “One of the steps is getting a license. There is a legal presumption in state sales tax law that you aren’t collecting state sales tax until you get a license. They presume there’s a logical order – that you’ve done this in a methodical way and have done it before you open your doors.”

 

“The pool of people that are impacted by this is enormous – there will be thousands of sellers that are not in compliance,” he added.

 

It used to be that a seller could determine where it had physical presence, Peterson observed. “Now, it’s the customer that determines nexus. And note that both South Dakota and Hawaii tax accounting businesses,” he said. “So CPA firms with clients in one of those states are in the same boat.”

 

“Don’t panic,” concluded Peterson, who was director of sales tax for South Dakota for 10 years. “Call your CPA and figure a way of sorting out all your sales by state. That’s the only way you can make an informed decision as to where you should start collecting. Any retailer that doesn’t collect everywhere has to do that.”

 

 

 

Cannabis industry tax issues just got real

By Roger Russell

 

Matthew Price should have listened to his accountants.

 

The medical marijuana dispensary owner-operator in Oregon was sentenced to seven months in prison last month, in what appears to be the first federal sentencing of a legal cannabis business owner for tax crimes. Price, a co-owner of Cannabliss dispensaries, pleaded guilty to willfully failing to file income tax returns in connection with his cannabis stores, and did not file individual tax returns from 2011 to 2014 for income received from the dispensaries’ operations -- despite the advice of a number of CPAs who advised him during those years.

 

“As with any business, marijuana business owners must operate in strict compliance with the local, state and federal tax laws,” said Rachel Gillette, a partner and chair of Greenspoon Marder’s cannabis practice. For cannabis businesses, tax compliance is part of operating in a state-legal marketplace, and includes understanding IRC Section 280E and how it affects these companies and owners of flow-through marijuana entities. “A tax issue can cause big problems for marijuana businesses and business owners, as most states require license holders to be ‘tax-compliant’ in order to maintain the license,” Gillette said.

 

Code Section 280E prohibits the deduction of otherwise ordinary businesses expenses from gross income associated with the trafficking of Schedule I or Schedule II substances as defined by the Controlled Substances Act.

 

Specifically, the statute states: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.” (Internal Revenue Code Section 280E)

 

Cannabis retailers, therefore, are denied the deductions or credits normally available to businesses, since cannabis falls under the definition of a Schedule I substance – and therefore they should pay tax on their gross income.

 

The cannabis sector faces intense scrutiny from the IRS, as marijuana businesses are audited at greater rates than other businesses, according to Gillette. The IRS is aggressively applying the 1982 Tax Code provision Section 280E. Because many business owners and even tax accountants do not know how Sec. 280E applies, it often causes tax deficiencies for businesses and business owners, even with their best efforts.

A marijuana-growing business in Colorado

Price was a member of the Oregon Liquor Control Commission’s Recreational Marijuana Technical Advisory Retail Subcommittee in 2015 and helped to advise the OLCC in adopting rules for the regulation of the industry.

 

“The prosecution serves as a reminder for people in the marijuana industry that they will be subject to heightened scrutiny by tax and regulatory authorities, and because of this they really need to be in strict compliance with local and federal tax filings and payments,” said Gillette.

 

The reason for the greater risk of audit is not because of the nature of the industry but because it is typified by a significant lack of banking, according to Gillette.

 

“Cannabis businesses are cash-intensive,” she said. “Many of them don’t have bank accounts. Banks are not keen on offering accounts to businesses that are not in compliance with federal law, even though it is legal in a particular state.”

 

“So cannabis businesses are underbanked,” she said. “In Colorado, only a handful will allow a marijuana business to open an account. There’s not nearly enough for all the licensed businesses to have an account, so many operate solely in cash. When that happens, there is likely to be additional audits.”

 

“If you’re a CPA and are helping a marijuana business be compliant, that’s OK,” she said. “But your clients should be reminded that they will be subject to increased scrutiny and they must focus on strict compliance with the law, including the tax law.”

 

 

 

Social Security to provide 2.8% COLA for 2019

By Michael Cohn

 

The Social Security Administration said Thursday that the cost of living adjustment, or COLA, for 2019 will be 2.8 percent, providing larger Social Security and Supplemental Security Income benefits for more than 67 million people tied to the rate of inflation.

 

The 2.8 percent COLA will start with benefits payable to more than 62 million Social Security beneficiaries in January 2019, while increased payments to more than 8 million SSI beneficiaries will begin on Dec. 31, 2018. The increases are tied to the Consumer Price Index as determined by the U.S. Bureau of Labor Statistics.

 

Some other adjustments are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax will increase to $132,900 from $128,400.

 

The Social Security Administration has also posted a fact sheet showing how some tax rates and maximum taxable earnings will or won’t change next year, although the tax rates for both employees and self-employed won’t change.

 

Every year, the Social Security Administration releases a cost of living adjustment for Social Security benefits based on an automatic, pre-determined formula. Last year, the COLA was 2.0 percent. In 2017, it was 0.3 percent.

 

Social Security and SSI beneficiaries are usually notified by mail in early December about their new benefit amount. This year, for the first time, most people who receive Social Security payments will be able to see their COLA notice online through their my Social Security account. People can create or access their My Social Security account online at www.socialsecurity.gov/myaccount.

 

Information about Medicare changes for 2019, when announced, will be available at www.medicare.gov. For Social Security beneficiaries who receive Medicare, the Social Security Administration won’t be able to compute their new benefit amount until after the Medicare premium amounts for 2019 are announced. The final 2019 benefit amounts will be sent to beneficiaries in December through the mailed COLA notice and via the My Social Security Message Center.

 

For more information, visit www.socialsecurity.gov/cola.

 

 

 

Top-spending GOP group says little of Trump tax law in campaign

By Sahil Kapur and John McCormick

 

A deep-pocketed Republican group that began the year vowing to focus on the tax overhaul has mentioned the GOP’s signature legislative achievement in just a fraction of its TV ads in 2018, a signal that the issue hasn’t been the political boon party leaders hoped it would be.

 

The Congressional Leadership Fund, a super-political action committee that’s the largest-spending political group this cycle, has put out 31,220 broadcast spots in the first nine months of 2018, just 17.3 percent of which referred to the tax law, according data from Kantar Media’s CMAG, which tracks political advertising.

 

The data underscore concerns among Republicans that the 2017 tax law — championed by President Donald Trump and GOP congressional leaders — hasn’t gained traction with voters ahead of the Nov. 6 election that will determine control of the House and Senate. Instead, the GOP base has been more stirred up by issues like immigration and crime in the Trump era.

 

Earlier this year, the CLF’s mission was clear.

 

“The central question for November is: Does the middle think we cut their taxes? If the answer to that is yes, Republicans will keep the House,” Corry Bliss, the executive director of the super-PAC said in a March interview. A month earlier, in a New York Times article, Bliss told Republican candidates who want to keep their majorities in Congress to “shut up and stop talking” unless it’s about the tax cut.

 

‘The Hammer’

A CLF spokeswoman defended the group’s decision to highlight other issues and take out attack ads against Democrats, arguing that it frees up Republican candidates to promote achievements like the tax law.

 

“As the outside group, CLF is the hammer. And while we are acting as the hammer — running the tough ads and doing our jobs to define and attack these candidates — that gives an opening to Republicans running to tell their good news stories,” Courtney Alexander said. “And I don’t think there’s any accomplishment better to highlight than the tax cut.”

 

But an internal Republican National Committee poll concluded that their party has “lost the messaging battle” on the tax law because Americans believe by a 2-to-1 margin that it benefits the wealthy and large corporations over the middle class. Separately, a Fox News poll released Sept. 23 showed 36 percent of likely voters said they’ve seen more money in their paycheck “as a result of the 2017 tax reform law,” while 59 percent said they haven’t.

 

Rates Cut

The law permanently cut the corporate tax rate from 35 percent to 21 percent and lowered income taxes across the board for eight years, while expanding the standard deduction and limiting some expenditures. Most Americans will see after-tax benefits, with top earners enjoying the largest gains, tax specialists have said.

 

If Republicans aren’t campaigning on the tax cuts, Democrats are happy to. Representative Ben Ray Luján, chairman of the Democratic Congressional Campaign Committee, said at a Bloomberg breakfast earlier this month that the GOP’s “tax scam is under water,” including in the most competitive House races.

 

“There’s a reason why we are not seeing Republicans run on their record, not run on the tax plan,” said Luján of New Mexico.

 

House Battle

As the midterm election campaign enters the final stage, independent analysts uniformly agree Democrats are well-positioned to take control of the House. The GOP’s Senate prospects are stronger, even though its majority hangs on a two-vote margin. Democrats are defending 17 more Senate seats than the GOP, including 10 in states Trump won in 2016.

 

In the 2018 election cycle, CLF has spent more than $88 million to help Republicans keep the House majority — more than any group, according to the Center for Responsive Politics.

 

The proportion of ads sponsored by the group touting tax reform peaked in February at 72.8 percent, the CMAG data shows, as it spent heavily on a Pennsylvania special election narrowly won by Democrat Conor Lamb. The group backed GOP candidate Rick Saccone.

 

In August, when CLF ad spending surged in House districts across the country, 14.4 percent of its ads mentioned the tax law. In September, when its ad spending continued to rise, that figure was 16.8 percent.

 

Ad Uses

An example is a September ad in Maine’s 2nd district attacking Democrat Jared Golden. It features a woman who says "Golden opposes tax cuts that are saving Maine families" money. GOP Representative Bruce Poliquin voted for the 2017 law.

 

The share of CLF ads that mention taxes rises to 48 percent when factoring in vague references — usually to paint Democrats as tax-hikers or criticize an element of their record — that don’t allude to the 2017 law and can be an off-hand mention. For instance, one ad that focuses on attacking Kansas Democrat Sharice Davids on Medicare ends a 30-second script by saying her health-care proposals would "raise our taxes."

 

CMAG categorizes an ad as referencing the tax law if it mentions such things as the “GOP middle-class tax cut” or “voted for tax breaks that put $2,000 dollars in your pocket” or “opposed the tax break for middle-class families” or “fought against the GOP tax giveaway.” Just a mention of “lower your taxes” or “tax breaks” isn’t enough to trigger the tag.

 

The issue of immigration, which fueled Trump’s rise, was mentioned in 16.4 percent of CLF ads. Health care was cited in 29.4 percent of ads, as the GOP seeks to counter a Democratic assault on its proposals to weaken preexisting condition protections by highlighting some Democrats’ support for expanding Medicare to all Americans. Government spending was referenced in 38.5 percent of CLF ads, and terrorism was alluded to in 7.9 percent.

 

CLF has played up the culture wars in its ads, accusing numerous Democrats of supporting an “open borders” immigration policy — a staple of Trump’s stump speeches — and channeling fears among older white voters of demographic changes in the country.

 

The group has faced criticism over ads that distorted Democrats’ records, such as one implying that Virginia Democrat and former CIA officer Abigail Spanberger sympathizes with terrorists because she taught English at a Muslim school that two terrorists attended after she left. Another CLF ad says Ohio Democrat Aftab Pureval worked for a firm that helped “Libyans reduce payments owed to families of Americans killed by Libyan terrorism.” He joined after the deal was reached and worked as an antitrust litigator.

 

 

 

Is there a future for tax refund checks?

By Roger Russell

 

Half of the checks processed by the Department of the Treasury are from tax returns, even though 95 percent of refunds to taxpayers are electronic, according to Stephen Mankowski, president of the National Conference of CPA Practitioners.

 

“Should we still have refunds made by check? These will likely continue in the foreseeable future, because there is still a segment of the population that is ‘unbanked,’” said Mankowski, who attended the September IRS National Public Liaison meeting, which focused on the future of electronic refunds, cyber attacks on tax professionals, tax reform implementation and a new e-services user agreement. “In addition, there are security features inherent with checks, other than simply the physical check.”

 

“Understandably, the future vision is to become all electronic. Getting there necessitates seeing why both individual and corporate taxpayers still want paper check refunds,” he continued. “The Treasury is working with the IRS to determine what percentage of checks were originally requested versus those having direct deposit issues.”

 

Cyber attacks on tax practitioners are continuing, and the IRS and its Security Summit partners have stepped up efforts to battle these attacks.

 

“Overall, the risk of fraud has increased as more PII [Personally Identifiable Information] has become available,” Mankowski said. “Large-scale cyberattacks are on the increase, posing threats to the IRS. Stolen CPA data is being used to process fraudulent returns.”
“We’re starting to see fraudsters filing legitimate returns for a taxpayer, but just changing the banking information. That’s the next step they need to work on, because at this point the IRS does not have a way to verify that a refund is going to the taxpayer’s bank account,” he said.

 

“The Wage & Investment and Policy Departments are working to redact [personal identifying information] on forms that are faxed or mailed to the taxpayer and their representatives,” he said. “The financial entries would not be redacted, but the other information would be. Specifically, redacted information would include employer name, address and EIN number, since these are sued to prepare fraudulent W-2s.”

 

One of the problems with redacting is that it’s not always feasible for taxpayers to go back to their former employer for a copy of their W-2, Mankowski observed: “When you end up with the first four letters of an employer’s name, it may not be sufficient for the taxpayer to know who the employer was. For example, in a franchise situation, the name of the corporation or partnership which owns the franchise may have nothing to do with the actual name of the franchise.”

 

Redacting was set to begin on Sept. 23, 2018. On Jan. 1, 2019, faxing to taxpayers and their representatives will end, and after tax season, mailings to third parties will end.

 

Wage and income transcripts are available via IRS e-Services and mailed to client addresses, Mankowski noted. “About 900,000 overdue returns were filed during 2017 to bring taxpayers into compliance. The surprise is that the IRS will be redacting data even when the information is being provided to the CPA’s secured mailbox within e-Services. The practitioner complaint is that the CPA has been authenticated to initially gain access to e-Services, plus the IRS uses multi-factor authentication to enter. In addition, the CPA needs to have a power of attorney on file within the IRS [Centralized Authorization File] unit. The IRS was not able to explain why this added security was needed.”

 

Mankowski suggests that practitioners put in passwords on software from prior years. “If they can’t get your 2017 or 2016 data, they’ll try for 2015 and get information that the bad guys like to get,” he said. “It costs nothing to put in a password for prior years, or multi-factor authentication.”

 

The Tax Reform Implementation Office is making a concerted effort to communicate with practitioners and taxpayers, Mankowski indicated. He noted that that professionals should not be overly dependent on their software, and need to be aware of tax reform changes to ensure that the calculations are correct.

 

Effective Oct. 14, 2018, a new e-Services user agreement became effective. “All users will have to acknowledge the new agreement the next time they access e-Services after this date,” said Mankowski. “The new agreement, which tends to be more high-level, should be read to ensure they can adhere to the enhanced requirements.”

 

 

 

Tax-savvy withdrawals in retirement

Consider a simple strategy to help reduce taxes on retirement income.

FIDELITY VIEWPOINTS

 

Key takeaways

  • How and when you choose to withdraw from various accounts in retirement can impact your taxes in different ways.
  • Consider a simple strategy to potentially pare taxes in retirement: Take an annual withdrawal from every account based on that account's percentage of overall savings.
  • Don't go it alone. Be sure to check with a tax advisor for help reducing taxes and have a plan to manage withdrawals from retirement accounts.

 

Ways to withdraw money in retirement

 

It's official: You're retired. That probably means no more regular paycheck, and that you may need to turn to your investments for income. But remember—the impact of taxes is just as important to consider now as it was when saving for retirement.

 

The good news is that in retirement there may be more options to increase after-tax income, especially when savings span multiple account types, such as traditional retirement accounts, Roth accounts, and taxable savings like brokerage or savings accounts. The not-so-good news is that choosing which accounts to draw from and when can be a complicated decision.

 

"Many people are seeking ways to help reduce the taxes that they will pay over the course of their retirement," says Andrey Lyalko, vice president of Fidelity financial solutions. "Timing is critical. So, how and when you choose to withdraw from various accounts—401(k)s, Roth accounts, and other accounts—can impact your taxes in different ways."

 

Taxes matter: How different accounts are taxed

 

Taxable

Traditional*

Roth

Examples

Brokerage, savings

Traditional 401(k), Traditional 403(b), IRA, Rollover IRA, etc.

Roth 401(k), Roth 403(b), Roth IRA

Taxes to keep in mind when withdrawing

Capital gains taxes

Income taxes

None*

Important factors

0% long-term capital gains rate if ordinary taxable income is within applicable ranges

  • Taxed at ordinary income tax brackets
  • Potentially higher tax rates the more you withdraw
  • Part of calculation to determine Social Security tax and Medicare premiums

Has no impact on any tax calculation

For illustrative purposes only. Roth distributions are assumed to be eligible for tax-free and penalty free treatment. 


*A 10% early distribution penalty may apply if you are under age 59½. In addition, the 401(k) and 403(b) may have plan limitations that would prevent a withdrawal prior to a triggering event such as death, termination, disability, or retirement.

 

Finding the right withdrawal strategy

 

Let's start with a key question that many retirees ask: How long will my money last in my retirement?

 

As a starting point, Fidelity suggests you consider withdrawing no more than 4-5% from your savings in the first year of retirement, and then increase that first year's dollar amount annually by the inflation rate. But from which accounts should you be taking that money?

 

Traditionally, many advisors have suggested withdrawing first from taxable accounts, then tax deferred accounts, and finally Roth accounts where withdrawals are tax free (see illustration below). The goal: to allow tax-deferred assets to grow longer and faster.

 

For most people with multiple retirement saving accounts and relatively even retirement income year over year, a better approach might be proportional withdrawals. Once a target amount is determined, an investor would withdraw from every account based on that account’s percentage of their overall savings.

 

The effect is a more stable tax bill over retirement, and potentially lower lifetime taxes and higher lifetime after-tax income. To get started, consider these 2 simple strategies that can help you get more out of your retirement savings, depending on your personal situation.

 

Traditional approach: Withdrawals from one account at a time

 

To help get a clearer picture of how this could work, let's take a look at a hypothetical example: Joe is 62 and single. He has $200,000 in taxable accounts, $250,000 in traditional 401(k) accounts and IRAs, and $50,000 in a Roth IRA. He receives $25,000 per year in Social Security and has a total after-tax income need of $60,000 per year. Let's assume a 5% annual return.

 

If Joe takes a traditional approach, withdrawing from one account at a time, starting with taxable, then traditional and finally Roth, his savings will last slightly more than 22 years and he will pay an estimated $74,000 in taxes throughout his retirement.

 

Withdrawing from one account at a time can produce a "tax bump" midway in retirement

 

https://www.fidelity.com/bin-public/060_www_fidelity_com/images/Viewpoints/RET/Tax_efficient_withdrawals_2018_chart_1new.jpg

 

For illustrative purposes only. Assumes 5% annual rate of return. Does not consider state and local taxes. All values in real terms and all tax rules assumed to be 2018 tax rules for entire time period and assumes a 22% tax bracket.

 

Note that with the traditional approach, Joe hits an abrupt "tax bump" (see red circle in chart) in year 8 where he pays over $5,000 in taxes for 11 years while paying nothing for the first 7 years and nothing when he starts to withdraw from his Roth account.

 

In this scenario, a proportional withdrawal strategy in retirement cuts taxes by almost 40%

 

https://www.fidelity.com/bin-public/060_www_fidelity_com/images/Viewpoints/RET/Tax_efficient_withdrawals_2018_chart_2new.jpg

 

Assumes 5% annual rate of return. Does not consider state and local taxes. All values in real terms and all tax rules assumed to be 2018 tax rules for entire time period and assumes a 22% tax bracket.

 

Proportional withdrawals

 

Now let's consider the proportional approach. As you can see in the graph above, this strategy spreads out and dramatically reduces the tax impact, thereby extending the life of the portfolio from slightly more than 22 years to slightly more than 23 years. "This approach provides Joe an extra year of retirement income and costs him only $46,000 in taxes over the course of his retirement. That's a reduction of almost 40% in total taxes paid on his income in retirement," explains Lyalko.

 

Traditional vs. proportional withdrawal strategies

 

https://www.fidelity.com/bin-public/060_www_fidelity_com/images/Viewpoints/RET/Tax_efficient_withdrawals_2018_chart_5.jpg

 

Source: Fidelity Investments. For illustrative purposes only. Does not consider state and local taxes. All values are in real terms and all tax rules assumed to be 2018 tax rules for entire time period.

 

By spreading out taxable income more evenly over retirement, you may also be able to potentially reduce the taxes you pay on Social Security benefits and the premiums you pay on Medicare.

 

Expecting relatively large long-term capital gains?

 

Spreading traditional IRA withdrawals out over the course of retirement lifetime may make sense for many people. However, if an investor anticipates having a relatively large amount of long-term capital gains from your investments—enough to reach the 15% long term capital gain bracket threshold—there may be a more beneficial strategy: First use up taxable accounts, then take the remaining withdrawals proportionally.

 

The purpose of this strategy is to take advantage of zero or low long-term capital gains rates, if available based on ordinary income tax brackets. Tax rates on long-term capital gains (applied to assets that are held over 1 year) are 0%, 15% or 20% depending on taxable income and filing status (see tables). Assuming no income besides capital gains, and filing single, the total capital gains would need to exceed $38,600 before taxes would be owed.

 

Tax rates: Singles

 

Taxable Income

Ordinary Income Tax bracket

Long-term capital gains rate

Up to $9,525

10%

0%

$9,526 to $38,600

12%

0%

$38,602 to $38,700

12%

15%

$38,701 to $82,500

22%

15%

$82,501 to $157,500

24%

15%

$157,501 to $200,000

32%

15%

$200,001 to $425,800

35%

15%

$$425,801 to $500,000

35%

20%

$500,001 and over

37%

20%

 

Source: https://taxfoundation.org/2018-tax-brackets/; Does not include the 3.8% Medicare surtax on net investment income.

 

Tax rates: Married, filing jointly

 

Taxable Income

Ordinary Income Tax bracket

Long-term capital gains rate

Up to $19,050

10%

0%

$19,050 to $77,201

12%

0%

$77,201 to $77,400

12%

15%

$77,400 to $165,000

22%

15%

$165,001 to $315,000

24%

15%

$315,001 to $400,000

32%

15%

$400,001 to $479,000

35%

15%

$479,001 to $600,000

35%

20%

$600,001 and over

37%

20%

 

Source: https://taxfoundation.org/2018-tax-brackets/; Does not include the 3.8% Medicare surtax on net investment income.

 

One strategy for retirees to help reduce taxes is to take capital gains when they are in the lower tax brackets. For example, single filers with taxable income less than $38,600, are in the 2 lower tax brackets. That equates to a 0% tax on capital gains. If taxable income is between $38,601 and $425,800, long-term capital gains rate is 15%. Remember, the amount of ordinary income impacts long-term capital gain tax rates.

 

Meet Jamie, a hypothetical single filer with $23,525 in ordinary income and $5,000 in long-term capital gains. After taking advantage of the $12,000 standard deduction, she will have $9,525 ($23,525 - $12,000) subject to a 10% income tax, but her $5,000 in capital gains will be taxed at 0%. Estimated total tax due: $953.

 

Now meet David a hypothetical single filer who has $38,601 in ordinary income and $5,000 in long-term capital gains. His first $9,525 of ordinary income will be taxed at 10%, the remaining $29,076 of ordinary income at 12%, and, because of his higher income tax bracket, the $5,000 in long-term capital gains will be taxed at 15% or $750. His estimated total tax due: $5,192.

The big difference: Jamie pays zero on her long-term capital gains because her income is below that key threshold of $38,600, but David pays 15% on his $5,000 because of his higher earnings.

 

Jamie and David: See how their income is taxed

 

 

Jamie

David

Ordinary income

$23,525

$38,601

Long-term capital gains

$5,000

$5,000

Tax on long-term capital gains

$0

$750

Income taxed at 12% rate

$0

$29,076

Income taxed at 10% rate

$9,525

$9,525

Estimated total tax paid

$953

$5,192

 

For illustrative purposes only. Jamie's and David's scenarios are hypothetical. Does not consider state and local taxes. All values in real terms and all tax rules assumed to be 2018 tax rules for entire time period. Example assumes Jamie takes the standard deduction of $12,000 for single filers.

 

Investors that can take advantage of the 0% long term capital gain rate may want to consider using their taxable account first to meet expenses. Once the taxable account is exhausted, the proportional approach can then be applied.

 

Additionally, this strategy allows investors to keep their assets in more tax-efficient accounts for a longer period of time by delaying withdrawing from their traditional and Roth accounts where the assets can grow tax-deferred or tax-exempt, respectively.

 

Plan ahead

 

Optimizing withdrawals in retirement is a complex process that requries a firm understanding of tax situations, financial goals, and how accounts are structured. However, the 2 simple strategies highlighted here could potentially help reduce the amount of tax due in retirement.

It's important to take the time to think about taxes and make a plan to manage withdrawals. Be sure to consult with a tax or financial advisor to determine the course of action that makes sense for you.

 

 

 

So How’s That Supply-Side Trickle-Down Theory Working Out For You?

by James Edward Maule

 

Readers of this blog know that I am not a fan of supply-side trickle-down economic theory and the tax policy based on it. One of my many commentaries on the topic closely analyzed the failure of the theory in Kansas, as described in Kansas Demonstrates Again Why Supply-Side Economics Fails. As I had written in an earlier post, The Tax Fake That Will Not Die, “Supply-side economics is a fake.”


Several days ago, Noah Smith looked at the results of the latest federal supply-side trickle-down exercise. In his Philadelphia Inquirer article, Smith examined the impact of the 2017 tax cuts. He explains that those cuts, particularly the corporate tax cuts, were supposed to generate wage increases. Like its predecessor supply-side tax cuts, this tax cut also failed to do what tax cut advocates expected and advertised. Despite those previous failures, the supply-side acolytes claimed that corporate tax cuts would be more effective because corporate tax rates were relative higher, corporate taxes affect not only the wealthy but also employees and customers, and corporate taxes are more harmful to investment than individual taxes. How did that work out?

At first glance, tax cut proponents shine the spotlight on an apparently booming economy, a small uptick in corporate investment, and unemployment is low. Smith points out that perhaps some, or even much, of the economic growth is doe to “demand-side fiscal stimulus effects.” Yet wages remain stagnant. Higher employment among low-wage job holders doesn’t do much for those who are trying to make ends meet. Smith describes studies showing that “Two common measures of real wages are still below the peaks they hit in the third quarter of 2017.” Another study concluded that a comparison of “the size of the effective tax cuts received by various industries with the change in their wages between the first half of 2017 and the first half of 2018” did not reveal any correlation between the two. The same study concluded that there was “no correlation between tax cuts and employment changes at the industry level.” According to Smith, “That's bad news, since more hiring and tighter labor markets should be the mechanism by which corporate tax cuts raise wages.” Yes, it’s bad news for wage earners, and it ought to be bad news for supply-side theory devotees.


Smith then dismisses those bonus payments praised by the tax-cut folks. Smith concludes that the bonus trend was “exaggerated,” and that an economic study demonstrated that the bonuses did not generate a significant increase in 2018 compensation. Smith notes that the study implies that the bonus claims “were mostly a publicity move.” No kidding. Again, readers of MauledAgain know that I have consistently characterized the bonus payments as what they really are, namely, crumbs, as explained in posts such as Those Tax-Cut Inspired Bonus Payments? Just Another RuseThat Bonus Payment Ruse Gets BiggerOh, Those Bonus Payments! Much Ado About Almost NothingMuch More Ado About Almost NothingYou’re Doing What With Those Tax Cuts?Arguing About Tax Crumbs, and Don’t Want a Crumb? Here’s Dessert But Give Back Your Appetizer and Beverage.

.
Smith asks, “So, what's going on? Why isn't the tax cut raising wages?” He gives two answers. First, he suggests, “Perhaps the impact of tax cuts will be felt only over a period of years rather than months. After all, it's important not to read too much into short-term economic data.” Second, he explains, “ But, it also might be the case that the supply-siders are simply wrong. Perhaps those who believed that a substantial amount of the corporate tax cut would go to workers were doing their empirical studies incorrectly, or plugging the wrong numbers into their models. Or maybe U.S. corporations were simply so successful at avoiding taxes before the tax cut that the new lower rate hasn't really done anything other than to allow them to save money on accountants and lawyers.” Or perhaps the belief that people grabbing tax cuts will share what they took from the buffet with the people at the back of the line ignores the practical reality of greed and money addiction among the oligarchs.


Smith closes with a prediction. He writes, “ Either way, if Trump's corporate tax cuts end up having no observable effect on workers' pay, it will be the final blow to the supply-side worldview.” Putting aside the fact that these aren’t Trump’s corporate tax cuts but a tax giveaway to corporations advocated by many Republicans long before Trump arrived on the political scene, the question is, will the next inevitable economic and financial crash dissuade the supply-siders and convert them to the realistic demand-side approach? Two years ago, in Tax Perspectives of the Wealthy: Observing the Writing on the Wall, I wrote, “The death of supply-side, trickle-down economic theory is a slow one, but its final breath draws nearer.” Yet a year later, the title of one of my posts revealed my dismay at the inability of supply-siders to recognize the failure of their dream: The Tax Fake That Will Not Die. I now worry which dies first, stubborn supply-side ignorance or the American economy and the nation and dreams that depend on it.

 

 

 

7 Ways for Everyone to Save on Taxes Under the New Tax Law

Gordon McNamee, CPA October 12th, 2018Category: Tax Reform

 

After a year of hearing about the effects of tax reform on the American public, it’s just about time for all of us to see exactly what impact it’s going to have on each of us. Though our 2018 returns won’t be due until April, now’s when you need to start familiarizing yourself with which of your favorite tax breaks are gone and how to take best advantage of any new ones that may advantage you.

 

Here are seven of the most straightforward benefits provided by the new law:

 

  1. The new child and family tax credits

Though some tax benefits take the shape of deductions you can subtract from the income you’ve earned, those that provide a credit are even more impactful as they come straight off of the bottom line. Starting with tax year 2018, one of those credits — the child tax credit— has doubled, and it’s expected to make a big difference for American families.

 

Previously, families who had children under the age of 17 and were entitled to a $1,000 credit for each qualifying child and if the family had at least $3,000 of earned income (income from working) that credit was refundable, meaning it could eliminate the amount of taxes owed and even result in a refund check from the government.  Eligibility for that credit was limited by modified adjusted gross income (MAGI), with the phase-out for single filers beginning at $75,000 ($110,000 for joint filers). This meant that taxpayers needed to calculate their adjusted gross income, add back in certain deductions, and then for every $1,000 over the $75,000/$115,000 threshold, they had to reduce the $1,000 per child credit by $50. An individual filer with two children making $40,000 over the $75,000 threshold would have to drop their available credit by $2,000, taking it down to nothing.

 

All that has changed significantly in 2018: the credit itself has increased to $2,000 while the earned income requirement has dropped to $2,500. Perhaps most importantly, the threshold amounts have increased dramatically: it jumped from $75,000 to $200,000 for single filers and from $115,000 to $400,000 for joint filers. Though the amount that will be available as a refund is limited to $1,400, it is still a considerable advantage that will be extended to many more families than it previously had been.

 

The new tax law also introduced a family tax credit for those who have older children who are still dependents. Families whose children are 17 or older will get a $500 credit for each child who has aged out of the child tax credit. Though this credit is not refundable at all, it provides additional help for families still supporting their older children. Both the family tax credit and the child tax credit will expire in 2025, though it is always possible for it to be renewed or extended.

 

  1. Tax Deferred Savings

When you put money that you earn into a special tax-deferred retirement account, you effectively reduce your overall income. If you are able to put enough away, you not only can end up owing less in taxes by virtue of being in a lower tax bracket, but also have the positive impact of having funds grow on a tax-deferred basis that will be available to you when you retire. One of the most popular of these types of accounts is the 401K, a program offered by employers. If a 401K is available to you, there are certain steps that you need to take to make sure that you are using it to your best advantage. These include:

  • Making sure that you are maximizing any matching funds that your employer offers.
  • Contributing as much to the fund as you can afford to. 

 

Tax deferred savings are not reserved for employees. Those who are self-employed can avail themselves of similar types of accounts known as SEPS (Simplified Employment Pensions) or individual (vs. employer-sponsored) 401K plans.

 

  1. IRA Accounts

If you can take advantage of a traditional Individual Retirement Account, you’ll get much of the same benefit as is offered by a 401K tax deferred account. Unfortunately, not everybody is eligible as a result of various restrictions that have been placed on them. They are not available to higher income taxpayers who have workplace retirement accounts (and their spouses. Lower income people who have workplace accounts can make IRA deposits or partial deposits depending upon their income.

 

If you are eligible to open an IRA, there are also limitations on how much you can deposit in a given tax year. For those who are under the age of 50, the limit is $5,500, while those who are 50 and above are able to contribute up to $6,500. However much you deposit each year will be deducted straight off of your taxable income, no matter what your filing status.

 

  1. Health Savings Accounts

Regardless of whether you get your health insurance through your workplace or you purchase it on your own, it’s a good idea to open a Health Savings Account. These are savings vehicles into which you can deposit pre-tax money. Though the intended use of these accounts is the payment of medical expenses, including items like co-pays, deductibles, dental and vision costs and other out-of-pocket expenses not covered by insurance, the way that they are set up provides taxpayers with the opportunity to minimize taxes three ways. The first way is through the deposit itself: monies deposited into an HAS are not subject to tax of any kind, whether local, state, federal, or even FICA. Once in the account, your money is tax-deferred, and any withdrawals that are taken in order to pay for medical expenses are tax free. People who are focused on getting the maximum benefit from these accounts will deposit as much as they can and then leave the money untouched, opting to pay for health expenses with cash on hand that has already been taxed. Doing so may go against the original intent of the account, but it allows you to get the greatest possible tax-deferred growth.

 

  1. Flexible Savings Accounts

Much like the HSA account, a Flexible Savings Account allows you to set aside up to $2,550 each year for deductibles an other qualified health expenses. The cash is deposited pre-tax, effectively reducing the amount of income you have to pay tax on, but it’s different in that the cash must be used by year’s end or else you forfeit it entirely. Despite its name, it is not a savings account as much as a tax savings account. Depending upon your employer’s policies, you may be allowed a grace period if you don’t use all of the funds within the tax year, and some employer programs permit up to $550 to be rolled over into the next year’s account.

 

  1. Open Your Own Business

If you’ve long dreamed of becoming an entrepreneur, the new tax reform laws offer another good reason to go for it: people who own their own businesses (sole proprietors) and others with pass-through income who use Schedule C (such as Limited Liability Corporations and the owners of S corporations) are entitled to a dramatic new tax break. They are able to lower their taxable income by deducting 20% of qualifying earnings prior to calculating how much they owe the government. This can take a business owner from one tax bracket to the next lower bracket, though not all businesses are able to take advantage of the savings. There are phaseouts for single filers whose income is more than $157,500, and for those filing using a married filing joint return the phase out threshold is $315,000.

 

  1. Education Tax Breaks

If you’ve been longing to expand your education, whether in your own field or in a different one, under the new tax law your employer is able to offer you up to $5,250 of educational assistance that will not be taxable to you as a benefit and will not be reflected on your end-of-year earnings statement. This is true whether you pursue undergraduate or graduate level education. Alternatively, if you are self-employed or employed and your employer doesn’t offer educational assistance, you are able to pay your own way for graduate level classes or other training and get a 20% credit on up to $10,000 of qualifying expenses under the Lifetime Learning Credit. There’s a phase out for this credit that kicks in once your income is over $57,000 or $114,000 for those using the married filing jointly tax status.

These seven items are just the most obvious benefits introduced under the tax reform act. You may be eligible for other credits and refunds depending upon your specific situation.


Gordon W. McNamee, CPA writes for TaxBuzz, a tax news and advice website. Reach him and his team at gordon@gordonmcnameecpa.com.   

 

 

 

Move Over Number Crunching: Accountants Do A Lot More To Help A Business Grow

By SageNext

 

Accounting has been stereotyped for the longest time now. The moment we hear anything related to accountants-the words like tax, accounting nerds, numbers, and figures is all that strikes the mind. This is especially untrue in the technologically advanced world of today where accountants are capable of performing multiple tasks with the help of cloud accounting.

 

Accountants do more than just taking care of accounts and taxes for their clients. Of course, this is what we expect them to do, but there is a growing need to broaden our mindset just as accountants have widened their field of expertise.

 

Why Hire An Accountant In The First Place?

Business owners, most importantly those who are starting a new venture, are always looking for ways to minimize their expenses. The goal primarily is to save as many bucks as possible, in as many areas as possible. As they intend to spend less, the owners are often seen doing their accounts on their own. Now, this may seem to be a great possibility if you are familiar with accounting or if you have years of experience in the field. Those who are new to accounting may need expert advice to avoid any unwanted surprises later.

 

Accounting is not everyone’s cup of tea. Especially when you own a business or are starting something new, most of your time will go into the planning and management of things. There is so much that an owner has to do. He has people to hire, he has to ensure that the business is running smoothly and also has losses to minimize. Apart from all this, the owner needs to be sure that his services and products are reaching where they are expected to. This is why a business needs to hire an accountant- for the sake of managing the accounts without making errors.

 

What Else Can An Accountant Do For You?

So you hired an accountant, and now your finances are being managed well. But is that all your learned accountant is capable of? Certainly not. An experienced accountant is worth a lot more and his capabilities need to be properly explored.


Entrepreneurs these days are looking to hire accountants who:

  1. Can be trusted with business advice
  2. Can use their expertise in formulating new business plans for the owners
  3. Guide them through the good days and bad
  4. Help them introduce the changing technology into their business
  5. Guide them about tax compliance and help them implement the tax and accounting software

 

What Is In An Accountant’s Name?

Accountants will obviously do what their title says- accounting. You may have hired an accountant because you were looking for a good credit score for your company. But who says there cannot be more to an accountant than just money and numbers? The perception obviously is already changing but we still have a long way to go.

 

Here are all the ways in which your accountant is going to optimize your business:

 

Kick Start Your Start-Up With Expert Advice From Your Accountant

Start-ups fail more often than not. This happens when

  1. The business structures are not determined correctly,
  2.  Finances are not properly managed,
  3.  Government regulations are not properly complied with,
  4. Daily expenses are not tracked properly, etc.

 

Issues like these can be avoided with the help of an accountant. He can meet all formalities for you and can help you manage your personal and business expenses properly. He will also take you through a number of other legal procedures which you are otherwise not familiar with.

 

Business Expansion Done Right

Businesses are volatile and the demands are ever changing. If the business is doing well, the owner is most likely to expand it. And in the case of loss-making, the business owner may prefer to shrink the process. In the case of expansion, the business owner will hire new employees and invest in infrastructure.

 

On the other hand, contracting the size of the business also needs to be a well-calculated move. These situations may pose certain challenges for the business owner. This is when expert advice is required. Having an accountant can guide you through all of these challenges in the best possible manner.

 

Financial Processes Well Taken Care Of

Your accountant will clear your plate of all the financial duties. He will take care of your balance sheets, calculate your profits and losses, prepare your yearly and monthly budget, and analyze your financial data to help you make informed business decisions in the future. The best part about hiring an accountant is that every step is taken while keeping in mind the financial regulations and laws.

 

Minimize Your Tax Bills The Legal Way

Your business accountant will help you to reduce costs in a number of ways. He studies the internal working of the business to the depth and formulates policies that favor the interests of the owner. An accountant knows best about the financial health of the company and he advises the owner in a way so as to add value to the business as well as to the employees.

 

Steer Clear of Stress And Save Your Valuable Time

If not for other reasons, this one can be a real savior for you as a business owner. When you are starting a new business, you would definitely want some extra time at hand. Your accountant can take the stress of managing finances away from you.

 

Be Your Support System Whenever Needed

An accountant can guide you through even the simplest of procedures. When expanding a business, you may be over or underestimating your finances. This is when your accountant can step in and clear the air for you. He builds strategies to provide expert solutions for the financial problems that your business faces and also perform a deep analysis to predict the future revenue possibilities related to the new ventures.

 

Accountants act as pillars of strength for a business. With their expert vision and expertise, accountants can guide their business owners in making decisions that are weighed-in and well informed. They not only add value to a business and help it flourish, but accountants also help to enhance the business image. They give valuable advice, audit your business internally to keep a check on performance, reduce costs to maximize profits and analyze a company’s financial position.

 

 

 

Plumbing the mysteries of Section 199A

By Roger Russell

 

One of the most convoluted sections of the Tax Cuts and Jobs Act is new Section 199A, which provides a 20 percent deduction on “qualified business income” of a qualified business, operated directly as a sole proprietorship or as a pass-through entity.

 

“The Section 199A deduction is one of the cornerstones of the Tax Cuts and Jobs Act,” said Mark Friedlich, senior director of global content assets at Wolters Kluwer Tax & Accounting NA. “This is an important deduction against income tax of up to 20 percent of qualified business income from a domestic business operated as a sole proprietorship, partnership, S corporation, trust or estate. Congress intended that Treasury provide detailed guidance with respect to the complex deduction,” he said. “The IRS recently issued these proposed regulations and a notice intended to provide more clarity and detail around the new tax provision.”

 

“Under the TCJA, QBI eligible for the deduction is all ordinary income earned in a trade or business, but it does not include shareholder wages, guaranteed payments or capital gains, even if they are earned from a pass-through entity,” Friedlich said. “The 199A deduction may be taken by eligible taxpayers for the first time on their 2018 federal income tax return to be filed in 2019. In the meantime, taxpayers may rely on the rules in the proposed regulations until final regulations are published in the Federal Register.”

 

The IRS has indicated that taxpayers involved in health, law, accounting, actuarial sciences and certain other professions do not get any 199A deduction once their income exceeds a specific threshold, he noted. “All others do not have this limitation. In any case, calculations for the deduction are complex and need to be carefully computed to avoid what will certainly be a target on audit.”

 

A look at the regs

While the Section 199A pass-through regulations proposed in August 2018 are not the last word on the subject, they clarify a number of areas and offer tax professionals a sense of direction on what might be to come. And with the comment period ending and a public hearing scheduled for Oct. 18, 2018, it is likely that more certainty will be available by the end of the year.

 

The Blue Book itself may provide some additional explanations for Section 199A, according to Jim Brandenburg, a tax partner at Top 100 Firm Sikich. It is produced by the Joint Committee on Taxation and attempts to clarify newly enacted tax legislation.

 

“The Blue Book is often used by the IRS in coming up with regulations and guidance,” he said. Initially, the Joint Committee hoped to have the Blue Book for the Tax Cuts and Jobs Act out by the end of the summer, but as Accounting Today went to press, it had yet to be released.

 

“Having some guidance is helpful,” said Brandenburg. “We’ll see what they come up with in the final regs. There are some questions regarding the aggregation rules. I have seen many groups offer comments to the IRS in advance of the hearings on the proposed regulations. Each group is trying to get the IRS to modify or clarify what will be in the final regulations to obtain the best tax treatment under Section 199A for their group or organization.”

 

“In general, the proposed rules are taxpayer-friendly, but there is a lot of complexity and nuances that are more involved, like the aggregation rules,” agreed Ryan Bryker, tax senior manager at Top 100 Firm Rehmann. “[Real estate investment trust] dividends and [publicly traded partnership] income are grouped separately from other activities,” he said.

 

“It will be a relatively painless process for doing the taxes for our generic plain-vanilla clients,” he said. “But some of our more complex clients — those with multiple trades or businesses or a more complicated structure — will require a much deeper analysis. There will be analysis and decisions to be made on how companies or business units are grouped to get the most beneficial treatment, and it will differ based on facts and circumstances.”

 

“For example, if there are several business units under one filing, there could be companies that have losses that you may or may not want to exclude from the aggregation to maximize the deduction based on wage limitations,” he said. “There’s not going to be a one-size-fits-all solution.”

 

The Treasury and IRS did a good job of responding to practitioner concerns, according to Jerry August, shareholder and chair of the Philadelphia federal tax practice at law firm Chamberlain Hrdlicka.

 

“The proposed regulations cover important definitional, computational and anti-avoidance guidance,” he said. “However, there are still open issues. There are a lot of weeds in these regulations.”

 

The proposed regulation addresses “stuffing,” in which high-cost property is stuffed into a qualified trade or business to calculate the 2.5 percent test at the end of the year.

 

The proposed regulations permit, but don’t require, individuals to aggregate related businesses into one activity, explained Howard Wagner, a partner at Top 10 Firm Crowe: “An individual is permitted to aggregate trades or businesses operated directly and trades or businesses operated through pass-through entities. Assume a taxpayer owns two pass-through entities that are an integrated business. Each one on its own is a business that qualifies for the pass-through entity deduction. Pass-through entity No. 1 has high profits and low wages. Pass-through entity No. 2 has low profits and high wages. The aggregation rules allow the individual to aggregate the two separate trades or businesses to maximize the benefits of the 20 percent deduction.”

 

The regs also contain some of the anti-abuse provisions expected by many practitioners, Wagner indicated.

 

“These anti-abuse provisions prevent service providers who are ineligible for the 20 percent deduction from separating their businesses into separate entities to take advantage of the 20 percent deduction,” he said. “For example, the owners of an accounting firm can’t get the 20 percent deduction for income generated by leasing a building from a separate entity back to the accounting firm.”

 

“The proposed regulations also clarify that you can count wages paid to your employees even if the wages are reported by someone else under a payroll agent relationship,” Wagner noted. “This is favorable to taxpayers, and it is not provided for in the statute.”

 

Lastly, the proposed regulations attempt to narrow the scope of service businesses that are ineligible for the pass-through entity deduction, according to Wagner.

 

“The definition of an ineligible consulting business has been limited to businesses that provide advice and counsel,” he said. “Along the same lines, the definition of a business that is ineligible for the 20 percent deduction has been narrowed to include only those businesses that provide endorsement services or receive income from licensing an individual’s image, likeness, voice, etc.”

 

 

 

Study finds cooking the books can pay off, caught or not

By Danielle Lee

 

About one-quarter of perpetrators of financial reporting misconduct experience a net benefit, even after getting caught, according to a new Columbia Business School study examining the most serious cases of misreporting.

 

Nearly 26 percent of perpetrators experienced a net benefit, according to the research, conducted by Columbia Business School professors Shiva Rajgopal and Dan Amiram and researcher Serene Huang, which also found that the risk of detection is only 25 percent.

 

The study focused on major episodes of financial misconduct since 2003 and compared the costs and benefits of getting caught by hand-collecting data on perpetrators. Benefits include salary bonuses and stock and options gains, while costs include disgorgements, fines, and foregone earnings for perpetrators who lose their jobs. For perpetrators who were caught, researchers compared these costs to other offsetting income, such as severance pay.

 

The study, “Does Financial Reporting Misconduct Pay Off Even When Discovered?,” covers 237 cases of financial conduct from 2003 to 2015, from three specific datasets: U.S. Securities and Exchange Commission enforcement actions, securities class-action lawsuits, and financial restatement announcements that triggered negative stock market reactions.

 

“With more than half of perpetrators potentially benefiting, the numbers speak for themselves. Top senior managers of large companies will certainly see that the odds are in their favor even if they get caught cooking the books,” said Shiva Rajgopal, Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School, in a statement. “Unless regulators improve their processes, research shows that financial reporting misconduct will continue to be an attractive option.”

 

Other key findings from the study include:

  • 39 percent of perpetrators were fired upon revelation of misconduct; of those fired, 64 percent went on to get a new job, usually in small private companies.
  • 25.9 percent of the perpetrators experience an overall gain even after getting caught: 2.7 percent from the SEC sample, 24.1 percent from the lawsuits sample, and 32.1 percent from the restatements sample. These benefits were usually in the form of lower forgone earnings and lower unrealized losses on their stockholdings. Of this group, only 7 percent were fired regarding their misconduct.
  • Analysis shows that the average cost of getting caught amounts to $26.7 million, with the notable hits coming via stockholding and forgone earnings “, suggesting that the stock market and the labor market are generally effective at punishing perpetrators.

The study is available here.

 

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Seahawks' sale price could take a hit after IRS denies tax break

By Joe Light

 

Two major sports franchises might soon be on the auction block following Microsoft Corp. co-founder Paul Allen’s death last week. But a recent Internal Revenue Service rule could cut the teams’ sales prices.

 

Allen died with no heirs and a $26 billion estate, including the National Football League’s Seattle Seahawks and the National Basketball Association’s Portland Trail Blazers. The teams together are worth more than $3 billion, according to the Bloomberg Billionaires Index. In addition to factors such as TV ratings and scarcity of teams for sale, their prices could have been enhanced by President Donald Trump’s 2017 tax law, which seemed to hand sports franchise owners a tax break.

 

Instead, the IRS said in August that team owners would be barred from the write-off -- one of the biggest benefits in the law -- that allows owners of pass-through entities such as partnerships and limited liability companies to deduct as much as 20 percent of their taxable income.

 

In its proposed regulations implementing the law, the agency said sports owners are considered service professionals just like lawyers and doctors, for whom the break fully phases out at $207,500 for single filers and $415,000 for married couples filing jointly. The IRS is expected to issue final regulations, which generally reflect its proposed rules, by the end of the year.

 

Arthur Hazlitt, a tax partner at O’Melveny & Myers LLP in New York who provided the tax structure and planning advice for hedge fund manager David Tepper’s acquisition of the Carolina Panthers, estimates the IRS rules could spur potential bidders to offer at least tens of millions of dollars less.

 

“It is clear that these are relatively sophisticated buyers and that tax planning does weigh heavily,” Hazlitt said. “These people don’t pick a number out of thin air” on what to bid, he said.

Hazlitt added that a billionaire’s vanity can be a more powerful force in deciding whether he or she makes a run at a team -- but the actual number offered generally takes after-tax profits into consideration.

 

Still, many potential buyers of Allen’s teams could structure their purchase in such a way that there are other tax perks -- like the depreciation of a stadium that comes with a team -- that override the loss of the pass-through break, Robert Willens, an independent tax expert, said in an email.

 

Allen’s estate hasn’t said what it intends to do with the teams. Bankers and lawyers who specialize in sports have said they expect the franchises to be sold with the proceeds going to his philanthropic endeavors. A representative for Vulcan Inc., which oversees Allen’s investments, including his stakes in the teams, didn’t respond to a request for comment.

 

Current franchise owners have appealed to the IRS to change the regulations before they’re finalized.

 

Sports skills

The owners might have a good argument to make, according to Laura Howell-Smith, managing director at Deloitte Tax LLP. The regulations seemed to narrowly define performance in the field of athletics to services by people who actually participate in an athletic event, she said. For example, it appears Congress was trying to prevent, say, a baseball player from forming a pass-through corporation that merely sold his own services, Howell-Smith said.

 

Team owners don’t necessarily have sports skills themselves and aren’t performing services in the field of athletics, she said. Franchises also make money not just from ticket sales but from selling TV rights, merchandise, concessions and myriad other business lines, according to Howell-Smith.

 

Ultimately, owners fighting to get the break are in the bizarre position of essentially arguing that sports make up a relatively small part of how a sports franchise makes money.

 

Major League Baseball Commissioner Rob Manfred this month wrote a letter to the IRS saying that the activities of baseball players “make up a de minimis amount of the total activities of all employees of a professional sports franchise.”

 

Minor league

At a recent American Bar Association panel with Treasury officials in Atlanta, one member of the audience went even further, arguing that minor league baseball fans don’t go to games to watch baseball.

 

“It’s really just the place you go to drink beer and have fun,” the attendee said. “You’re not paying your ticket to watch them play.”

 

Audrey Ellis, the Treasury official on the panel, seemed dubious.

 

“I would be hard pressed to say that’s not the field of athletics,” she said.

 

 

 

Social Security to provide 2.8% COLA for 2019

By Michael Cohn

 

The Social Security Administration said Thursday that the cost of living adjustment, or COLA, for 2019 will be 2.8 percent, providing larger Social Security and Supplemental Security Income benefits for more than 67 million people tied to the rate of inflation.

 

The 2.8 percent COLA will start with benefits payable to more than 62 million Social Security beneficiaries in January 2019, while increased payments to more than 8 million SSI beneficiaries will begin on Dec. 31, 2018. The increases are tied to the Consumer Price Index as determined by the U.S. Bureau of Labor Statistics.

 

Some other adjustments are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax will increase to $132,900 from $128,400.

 

The Social Security Administration has also posted a fact sheet showing how some tax rates and maximum taxable earnings will or won’t change next year, although the tax rates for both employees and self-employed won’t change.

 

Every year, the Social Security Administration releases a cost of living adjustment for Social Security benefits based on an automatic, pre-determined formula. Last year, the COLA was 2.0 percent. In 2017, it was 0.3 percent.

 

Social Security and SSI beneficiaries are usually notified by mail in early December about their new benefit amount. This year, for the first time, most people who receive Social Security payments will be able to see their COLA notice online through their my Social Security account. People can create or access their My Social Security account online at www.socialsecurity.gov/myaccount.

 

Information about Medicare changes for 2019, when announced, will be available at www.medicare.gov. For Social Security beneficiaries who receive Medicare, the Social Security Administration won’t be able to compute their new benefit amount until after the Medicare premium amounts for 2019 are announced. The final 2019 benefit amounts will be sent to beneficiaries in December through the mailed COLA notice and via the My Social Security Message Center.

 

For more information, visit www.socialsecurity.gov/cola.

 

 

 

Paul Allen’s $26B estate will take years to unravel

By Simone Foxman and Noah Buhayar

 

Paul Allen’s family office will live long and prosper.

 

The billionaire’s vast holdings at Vulcan Inc. — with real estate, art, sports teams and venture capital stakes — would take years to unravel, if that’s even what he wanted. Allen, who died Monday, had no spouse or children to divide his empire. But there are many others with interests at stake, including family, staff and charities, as well as potential investors eager to snap up pieces.

 

“Even though this is a person’s life and their personal holdings, it’s almost like the dissolution of a major corporation,” said Darren Wallace, an attorney for Day Pitney who handles estate affairs for high-net-worth clients. “Even if things go along as you might expect, it could easily be three to five years."

 

The Microsoft Corp. co-founder spent more than three decades outside the software company, amassing a variety of business and philanthropic endeavors. At least half his $26 billion fortune is probably earmarked for charitable purposes after he joined the Giving Pledge almost a decade ago, and an estate tax bill will apply on much of what remains. But important questions loom about which of his assets are likely to be liquidated.

 

Vulcan, the 32-year-old company that oversees Allen’s money, was the umbrella for a variety of investments, activism and philanthropic units. They include Vulcan Real Estate, a commercial portfolio that Bloomberg estimates is worth $1.5 billion, and Vulcan Capital, which tends investments in public and private companies. He also amassed one of the world’s greatest art collections, and held ownership stakes in two professional sports teams worth roughly $3 billion.

His philanthropic interests were split among several other units. The Paul G. Allen Family Foundation, started by Paul and his sister Jody, oversaw assets valued at $766 million at the end of 2016, according to the latest filing available. That private organization is distinct from the Allen Institute, a public charity that focuses on medical research, with Jody and several Vulcan employees serving as directors.

 

Lori Mason Curran, Vulcan Inc.’s director of real estate investment strategy, said no changes are imminent for Allen’s network of interests, including the investment firm.

 

“Paul thoughtfully addressed how the many institutions he founded and supported could continue after he was no longer able to lead them,” she said in an emailed statement, without elaborating. “Now, is the time to focus on Paul’s life and allow his family and friends space to grieve. We will continue to work on furthering Paul’s mission and the projects he entrusted to us.”

 

If other large estates are any guide, the legal transfer of his holdings will probably take years. Federal estate tax returns for deceased taxpayers must be filed within nine months, though many filers ask for a six-month extension. A large and complex estate like Allen’s — even when well-prepared for a succession — is likely to face an Internal Revenue Service audit, if only because of its size and complexity, said Wallace. During that time, administrative staffers are often required to deal with the agency’s questions.

 

“There are no changes imminent for Vulcan, the teams, the research institutes or museums,” Vulcan Chief Executive Officer Bill Hilf said Monday at a press conference in Seattle. “There’s a clear plan of what he wants done for his legacy.”

 

Allen’s death has already fueled speculation among professionals in Seattle’s real estate market about whether there might be opportunities for buyers to take over some of his properties and projects.

 

The company has buildings underway for Facebook Inc. and Alphabet Inc.’s Google, as well as a series of apartment complexes overlooking downtown. It’s also amassed land in nearby Bellevue, fueling speculation it could be developing a site for a major corporate tenant.

 

Allen leaned on plenty of people to run the operations. Ada Healey has led Vulcan Real Estate for nearly two decades, and was responsible for executing Allen’s plan to transform Seattle’s South Lake Union neighborhood from an out-of-favor industrial area into a thriving tech hub for Amazon.com Inc. and other companies.

 

“Ada is really, really good at what she does and the people around her really good at what they do,” said Tom Craig, a partner at DSC Capital, a commercial mortgage banking company in Seattle.

 

Vulcan Inc. owned companies and other entities that may not be easy to liquidate or transfer to a charitable vehicle. Far beyond real estate, for example, he founded Stratolaunch Systems, which has been developing the world’s largest plane to launch smaller vehicles into space.

 

— With assistance from Tom Metcalf

 

 

 

IRS revises backup withholding guide for new tax law

By Michael Cohn

 

The Internal Revenue Service has posted a revised publication on backup withholding for taxpayers with missing or incorrect names or Taxpayer Identification Numbers, reflecting the reduced 24 percent withholding rate in the Tax Cuts and Jobs Act.

 

Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), has been updated to reflect one of the changes in the tax overhaul that Congress passed last December. As a result of the change, starting Jan. 1, 2018, the backup withholding tax rate dropped from 28 to 24 percent.

 

Backup withholding applies in different situations such as when a taxpayer fails to supply their correct Taxpayer Identification Number to a payer, such as an employer. Typically, the TIN is the same as the taxpayer’s Social Security number, but in some cases, it can be an Employer Identification Number, Individual Taxpayer Identification Number or Adoption Taxpayer Identification Number. The IRS may also require backup withholding to be applied when a taxpayer has underreported their interest or dividend income on their tax return.

 

Publication 1281 provides other handy information to help payers who have to impose backup withholding on any payees, including a set of 34 frequently asked questions and answers. One of the FAQs says a payer who mistakenly backup withheld at an incorrect rate (such as the old 28-percent tax rate instead of the new 24-percent rate) doesn’t need to refund the difference to the payee. But a payer who opts to refund the difference has to do it before the end of the year and can then make the necessary adjustments to their federal tax deposits.

 

When backup withholding applies, payers have to backup-withhold tax from payments that aren’t otherwise subject to withholding. Payees could be subject to backup withholding if they:

• Fail to provide a TIN,

• Give the wrong TIN,

• Provide the TIN in the wrong way,

• Underreport interest or dividends on their tax return, or

• Fail to certify that they’re not subject to backup withholding for underreporting of interest and dividends.

Backup withholding can apply to most types of payments reported on Form 1099, including:

• Interest payments;

• Dividends;

• Rents, profits or other income;

• Commissions, fees or other payments for work performed as an independent contractor;

• Payments by brokers and barter exchange transactions;

• Payments by fishing boat operators, but only the portion that's in money and represents a share of the proceeds of the catch;

• Payment card and third-party network transactions; and

• Patronage dividends, but only if at least half of the payment is in money;

• Royalty payments.

 

Backup withholding can may apply to gambling winnings not subject to regular gambling withholding.

 

To stop backup withholding, the payee needs to fix any issues that led to it. They might need to give the right TIN to the payer, resolve the underreported income and pay the amount that’s owed, or file a missing tax return. The Backup Withholding pagePublication 505, Tax Withholding and Estimated Tax and Publication 1335, Underreporter Backup Withholding Questions and Answers offers additional information.

 

Payers report their backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. The 2018 form is due on Jan. 31, 2019. For extra details about depositing backup withholding taxes, see Publication 15, Employer’s Tax Guide. Payers also have to show any backup withholding on the information returns, such as Forms 1099, that they furnish to their payees and file with the IRS. Like regular federal income tax withholding, payees can claim credit for any backup withholding when filing their 2018 federal income tax return.

 

 

 

Saving the corporate income tax

By Roger Russell

 

The Tax Cuts and Jobs Act, signed into law nearly a year ago, may have rescued the corporate income tax, according to Jorge Barro and Joyce Beebe, fellows in public finance at Rice University’s Baker Institute for Public Policy.

 

The share of the corporate income tax in the federal government’s revenue has been steadily declining since the start of the postwar era, they noted.

 

“Immediately after World War II, the corporate income tax accounted for approximately 30 percent of the federal government’s gross receipts,” said Barro. “In the 1960s and 1970s, this ratio decreased to less than 20 percent, and the next two decades saw a further decline to 10 percent of federal revenue.”

 

Since the beginning of the 21st century, the ratio has been hovering around the 10 percent mark. “While some of this decline has been the result of reductions in the corporate tax rate, much of it is attributable to a declining corporate tax base,” said Beebe.

 

Total corporate income tax revenue as a share of gross domestic product has also trended downward over time, Barro and Beebe observed, citing the fact that although the tax rate was higher than that of other countries before tax reform ushered in the tax cuts of the TCJA, the U.S. collected a smaller share of corporate tax revenue as a percentage of gross domestic product.

 

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The cause of this phenomenon of high-rate, low-revenue collection has been the focus of the corporate tax reform debate for decades. Academic scholars, lawmakers, and the private sector all have different perspectives on how to repair the corporate income tax, and they all have legitimate reasons to hold different perspectives, suggested Barro and Beebe.

 

“Although the statutory rate was high, the effective rate – taxes paid divided by profits – was on par with other developed countries,” Beebe indicated. “Because of the credits, deductions, benefits, and subsidies included in the calculation, the tax base was narrow by design and the tax burden per dollar of profit was not as high as 35 percent.”

 

Two significant corporate tax provisions in the TCJA expanded the tax base – the net operating loss carryover modification and limits on interest expense deduction, according to Barro and Beebe.

 

“The Tax Cuts and Jobs Act provided a political solution to the drawbacks of the corporate income tax,” said Barro. “The base-broadening and rate-reducing features appeal to academia, and the significant rate reduction and favorable repatriation rate appeal to industry. U.S. businesses are facing an unprecedented low-CIT environment and a business-friendly atmosphere that is certain to compete with low-tax jurisdictions.”

 

Barro advocates low or no corporate income tax. “I’m a proponent of more taxation on the household side and less on the corporate side,” he said. “In theory, these are taxes that could just be paid at the household level. By taxing all business income at the household level, you add a measure of progressivity to business income taxation. For example, a wealthy person or a low-income individual who both own a share of the same company would pay the same corporate tax, but if business income were taxed at the household level, the higher-income individual would pay higher marginal taxes – there is some progressivity to paying taxes on dividends. So I would be in favor of taxing all business income at the household level and potentially raising the top marginal tax rate in order to eliminate the corporate income tax. But this is not likely to happen – there are a lot of reasons why the corporate income tax is going to remain.”

 

“Many issues remain, such as looming deficits, still-complex compliance procedures, and the uncertain longevity of the TCJA’s corporate provisions,” he continued. “There is not a single panacea for the CIT -- what is required is to find a compromise that everyone can live with. The TCJA offers a starting point for such a compromise to revitalize the corporate income tax.”

 

 

 

IRS offers guidance on claiming premium tax credit after new tax law

By Michael Cohn

 

The Internal Revenue Service issued a notice Thursday providing interim guidance to clarify how the suspension of the personal exemption deduction in the Tax Cuts and Jobs Act will affect some of the rules under the Affordable Care Act for claiming the premium tax credit for health insurance.

 

The tax overhaul that Congress passed last December eliminated personal exemptions, such as for claiming dependents, and also got rid of the individual mandate requiring most taxpayers to have health insurance coverage. The Tax Cuts and Jobs Act thus reduced the personal exemption deduction to zero for tax years starting after Dec. 31, 2017 and before Jan. 1, 2026 since most of the individual tax provisions in the law expire in 2025. However, the rules under the Affordable Care Act for claiming premium tax credits that help people buy health insurance coverage include references to claiming a personal exemption deduction. The rules can also affect eligibility for the premium tax credit, computation of the credit and reconciliation of advanced payments of the credit.

 

The Treasury Department and the IRS plan to amend the regulations to clarify how the rules should apply, but until the future guidance is issued, Notice 2018-84, which the IRS issued Thursday, provides some interim guidance:

 

1. Taxpayers are considered to have claimed a personal exemption deduction for themselves if they file a tax return for the tax year and don’t qualify as a dependent of another taxpayer for that year.

 

2. A taxpayer is considered to have claimed a personal exemption deduction for an individual other than the taxpayer if they’re allowed a personal exemption deduction for the individual and they list the individual’s name and Taxpayer Identification Number on the Form 1040 or on the Form 1040NR, U.S. Nonresident Alien Income Tax Return, that the taxpayer files for the year.

 

 

 

 

U.S. charges Russian accountant with conspiracy to interfere in elections

By Chris Strohm and Greg Farrell

 

A Russian national was charged by the U.S. for allegedly being one of the masterminds behind a conspiracy to interfere in both the 2016 and 2018 elections, marking the first charges related to next month’s congressional midterm vote.

 

The woman, identified as Elena Alekseevna Khusyaynova of St. Petersburg, Russia, allegedly served as the chief accountant for an operation known as “Project Lakhta,” the Justice Department said Friday in a statement. The department identified the operation as "a Russian umbrella effort funded by Russian oligarch Yevgeniy Viktorovich Prigozhin and two companies he controls, Concord Management and Consulting LLC, and Concord Catering."

 

The charges come as top U.S. law enforcement and intelligence agencies warn Americans about ongoing efforts by Russia, China and other foreign actors to interfere in the 2018 midterm and 2020 presidential elections.

 

The charges announced on Friday centered on a conspiracy that included the creation of thousands of social media and email accounts that appeared to be run by U.S. persons as part of what the conspirators referred to as “information warfare against the United States.”

 

Referring to Khusyaynova, the Justice Department said, “The financial documents she controlled include detailed expenses for activities in the United States, such as expenditures for activists, advertisements on social media platforms, registration of domain names, the purchase of proxy servers, and promoting news postings on social network.”

 

The case appears to be an outgrowth of a larger case filed by Special Counsel Robert Mueller in February, accusing Prigozhin and others of interfering in the 2016 election by pushing divisive social media campaigns that attacked Democratic candidate Hillary Clinton.

 

In that case, Mueller’s office cited examples of Russians who adopted online personas and used Twitter and Facebook posts to sow doubts about Clinton, urge voters to support Green Party candidate Jill Stein and galvanize support for then-candidate Donald Trump.

 

Concord Management and Consulting is fighting Mueller’s earlier charges in court. The company’s U.S. lawyer, Eric Dubelier of Reed Smith, won a significant legal point this week when the presiding judge ordered Mueller’s prosecutors to justify the charges they’d brought against Concord.

 

Of all the legal challenges that have been filed against Mueller so far by other defendants in his Russia probe, Concord’s attack on the special counsel’s charges is the first that appears to have a realistic chance of succeeding.

 

The new charges on Friday say that Khusyaynova, 44, played a central financial management role, in a conspiracy to conduct “information warfare against the United States," the Justice Department said. The conspiracy, which had a proposed operating budget of more than $35 million, “continues to this day,” according to the statement.

 

"This effort was not only designed to spread distrust towards candidates for U.S. political office and the U.S. political system in general, but also to defraud the United States by impeding the lawful functions of government agencies in administering relevant federal requirements," according to the department.

 

A criminal complaint against Khusyaynova does not include any allegation that the conspiracy had an effect on the outcome of a U.S. election. The complaint also does not allege that any American knowingly participated in the Project Lakhta operation.

 

 

 

NFL teams risk talent drain in high-tax states as breaks curbed

By Lynnley Browning

 

If your favorite NFL team doesn’t make it to the playoffs, President Donald Trump’s tax overhaul might be in part to blame.

 

The 2017 law could put teams in states with high personal income tax rates at a disadvantage when negotiating with free agents thanks to new limits on deductions, including for state and local taxes, according to tax economist Matthias Petutschnig of the Vienna University of Economics and Business.

 

Petutschnig’s research into team performance over more than two decades shows that National Football League franchises based in high-tax states lost more games on average during the regular season compared to teams in low or no-tax states. That’s because of the NFL’s salary cap for teams, according to Petutschnig; if they have to give certain players more money to compensate for higher taxes, it reduces how much they pay other players and lowers the talent level for the whole team.

 

“The new tax law exacerbates my findings and makes it harder for high-tax teams to put together a high-quality roster,” Petutschnig said.

 

The law set a $10,000 limit for the amount of state and local taxes that taxpayers can deduct on their federal returns — a pittance for professional athletes who live in states with high property taxes. It also eliminated the prized deduction for unreimbursed employee business expenses, which for football players means that union dues and fees for agents, public relations, business management or off-season trainers can’t be written off.

 

A player for the Miami Dolphins or Houston Texans, where no state income taxes are levied, “was always going to come out a whole lot better than somebody playing in New York,” said Jerome Glickman, a director at accounting firm Friedman LLP who works with professional athletes. “Now, it’s worse.”

 

Still, Glickman said the first priority for many athletes is to go where they think they’re going to win. While taxes may be a consideration, they’re rarely a deciding factor. And some players choose to set up official residences in low or no-tax states, so a team’s high state rate may not be such a deterrent.

 

Professional athletes do have to consider so-called jock taxes, which are levies that are calculated based on how many days a player provides professional services, such as playing in a game or training, in any state that administers an income tax.

 

Players on the New York Giants and New York Jets faced the third-highest average tax rate from 1994 to 2016 in Petutschnig’s study — 7.94 percent. Players on California teams including the Oakland Raiders, San Diego Chargers and San Francisco 49ers were hit with the highest average rate of 11.28 percent.

 

Patriots’ Exception

A California team won on average 2.75 fewer games compared to a team in a low or no-tax state over 23 years of regular seasons. That translates to losing 17 percent of the 16-game regular season — enough to make a difference in reaching the playoffs.

 

Overall, Petutschnig’s research found that a team above the median of 5.44 percent for average state tax rates wins on average almost two fewer games than a team below that rate. In 2016, the average state tax rate for football teams that made the playoffs was 4.62 percent; for those that didn’t, it was 5.93 percent.

 

His study shows there isn’t a significant correlation between performance and tax rates before the salary cap in 1994.

 

Petutschnig focused on the regular season because, he said, playoffs and the Super Bowl are more susceptible to upsets and randomness. Also, salaries for playoff games are paid by the NFL and don’t count against a team’s current $177 million salary cap.

 

In order to zero in on the effect of state taxes, Petutschnig controlled for factors that could influence a team’s record in a season, such as the length of its head coach’s tenure, the club’s success in previous seasons and the level of experience for its starting quarterback.

 

There are exceptions — most notably, the New England Patriots, who recorded the most regular season and Super Bowl wins from 1994 to 2016. Massachusetts’ average state tax rate was 5.48 percent during that time period, slightly above the median. Petutschnig credits the relatively low amount that Patriots’ quarterback Tom Brady’s annual salary takes out of his team’s salary cap, which means the team can afford to recruit better talent. Brady became the Patriots’ starting quarterback in 2001.

 

The SALT Factor

Now, a free agent considering a California team compared to one in Texas or Florida would need to make 10 percent to 12 percent more to compensate for his state tax bill, said NFL agent Joe Linta, who placed quarterback Joe Flacco at the Baltimore Ravens and Kyle Juszczyk at the San Francisco 49ers. The SALT limit is “a factor” in negotiations, Linta said.

 

Many teams don’t max out their cap, so they may have some wiggle room when recruiting players.

 

Joseph Criscuolo, a managing associate at accounting firm Drucker & Scaccetti who works with professional athletes, said that under the tax law, athletes “in the mid-range are going to break even,” with the tax law’s individual federal income rate cut compensating for lost deductions. But for the highest-paid athletes, the canning of deductions for unreimbursed expenses “is a big deal,” he said.

 

Under the old law, athletes could deduct those expenses if they exceeded 2 percent of their adjusted gross income.

 

“For well-heeled athletes making the big dollars, this hurts,” said Joseph Doren, the partner-in-charge of the sports and entertainment group at accounting firm PKF O’Connor Davies. Doren said he sees a link between tax rates and team performance, adding that the Raiders — who will eventually move to Las Vegas in no-tax Nevada — have often made the case that unequal tax rates create an uneven playing field.

 

Garoppolo’s Tax Hit

Quarterback Jimmy Garoppolo’s five-year $137.5 million contract with the San Francisco 49ers will mean an additional $3 million tax bill under the new tax law, according to Alan Pogroszewski, president of AFP Consulting, an accounting firm for professional athletes. Garoppolo would have saved $2 million in taxes under the new code if he had signed with the Denver Broncos in lower-tax Colorado.

 

So far, the 49ers are off to a weak start. Garoppolo suffered a season-ending injury last month and the team has won just one game and lost five.

 

Most athletes “insulate themselves” from knowing much about taxes, said Criscuolo. “In theory, if they were a corporate executive, they’d be freaking out.”

— With assistance from Eben Novy-Williams

 

 

 

Will The TCJA Upend The Non-Profit World?

By Howard Gleckman

 

The Tax Cuts and Jobs Act (TCJA) significantly changed the nature of the tax deduction for charitable donations. But will it transform giving itself and the non-profits that rely on those contributions?

 

I recently spent the better part of a day listening to advocates for non-profits, researchers, and government officials discuss those critical issues. This is what I heard:

 

  • The TCJA likely will accelerate a growing shift from low- and moderate-income contributors to a relatively small number of mega-donors, a trend that makes many in the non-profit sector very uncomfortable.
  • That shift will create winners and losers among non-profits. Religious and social service agencies may see contributions drop while bigger colleges, hospitals, and high-end arts organizations are largely unscathed.
  • The benefits of the charitable giving deduction may go well beyond its ability to reduce the after-tax cost of giving. The signal it sends—that charitable giving is a good thing—may be as important as the dollars donors save.
  • There is a lot we do not know about what motivates givers, especially younger donors.

 

For all its importance, the TCJA did very little to directly change the tax treatment of donations. But several provisions are likely to have powerful indirect effects. By substantially increasing the standard deduction (to $12,000 for singles and $24,000 for joint filers) and by capping the state and local tax (SALT) deduction to $10,000 annually, the 2017 law sharply reduces the number of households who itemize their deductions. The Tax Policy Center estimates that the law cut the number of itemizers in 2018 from 46 million to 19 million.

 

Striking declines

The effects on those deducting charitable gifts are especially striking. TPC and other analysts estimate that the TCJA could reduce donations by roughly 5 percent. TPC projects that only 8 percent of households will take the charitable gift deduction in 2018, compared to 21 percent last year. Only 5 percent of middle income households will deduct their gifts in 2018. Last year, 16 percent did so.

 

Even upper middle-income taxpayers are far less likely to take the deduction post-TCJA. In 2017, three-quarters of those in the 90th to 95th income percentile (who made between about $220,000 and $315,000) claimed the deduction. After the TCJA, barely one-third will deduct their charitable gifts.

 

By contrast, deductions by those at the very top of the economic food chain are largely unaffected. Last year, about 90 percent of those in the top 0.1 percent (who made $3.3 million-plus) claimed the deduction. This year, 89 percent will take it, and their average deduction will be a bit higher than last year.

 

Mega-donors

One reason is that those mega-donors will continue to itemize. When you are deducting hundreds of thousands of dollars for various expenses, a low five-figure hike in the standard deduction simply does not matter.

 

But what will a charitable deduction that largely benefits only a handful of very high-income givers mean for the charities themselves? That’s harder to know, but many non-profits are worried.

 

True, a $1 million non-profit could make its annual budget with a single very generous gift. But there are costs to such a model.

 

One is that a sole big giver would have enormous influence over that charity’s priorities, a situation that may not best serve its community.  

 

Another is that a tax system that subsidizes mostly large givers may discourage younger, smaller contributors from engaging with non-profits. It is axiomatic that today’s $100 contributor may become tomorrow’s $1,000, or $10,000, giver. And without those small givers, non-profits worry about where the next generation of donors will come from.

 

Disappearing givers

Recent studies show that the number of small givers has been declining for years. Indiana University foundthat from 2000 to 2014, the share of US households who donate at least $25 to charity fell from 65 percent to 56 percent, mostly due to a decline in low- and moderate-income contributors.  While the total value of gifts is rising, the number of donors is falling.

 

What role do tax subsidies play? That’s hard to know. Even before the TCJA, barely one in five households claimed a deduction for their charitable gifts. Among those with expanded cash income of less than $50,000, far fewer did. Yet, even without the subsidy, many gave anyway. And many stopped giving even before the tax subsidy was cut.

 

Still, the deduction seems to increase giving. The signal it sends, that society values charitable donations,  may be as important as the dollars themselves. If so, how will millions of donors respond to the message Congress has sent by eliminating their tax break?  

 

Some experts suspect many taxpayers—unaware of the TCJA’s changes-- will keep giving in 2018, only to learn next April that by claiming the standard deduction they will lose the tax benefit of their donations. Then, what will they do in 2019?  We will get to observe a fascinating natural experiment, though the nation’s non-profits would rather not be part of it.

 

7 Ways for Everyone to Save on Taxes Under the New Tax Law

By Gordon McNamee, CPA

 

After a year of hearing about the effects of tax reform on the American public, it’s just about time for all of us to see exactly what impact it’s going to have on each of us. Though our 2018 returns won’t be due until April, now’s when you need to start familiarizing yourself with which of your favorite tax breaks are gone and how to take best advantage of any new ones that may advantage you.

 

Here are seven of the most straightforward benefits provided by the new law:

 

  1. The new child and family tax credits

Though some tax benefits take the shape of deductions you can subtract from the income you’ve earned, those that provide a credit are even more impactful as they come straight off of the bottom line. Starting with tax year 2018, one of those credits — the child tax credit— has doubled, and it’s expected to make a big difference for American families.

 

Previously, families who had children under the age of 17 and were entitled to a $1,000 credit for each qualifying child and if the family had at least $3,000 of earned income (income from working) that credit was refundable, meaning it could eliminate the amount of taxes owed and even result in a refund check from the government.  Eligibility for that credit was limited by modified adjusted gross income (MAGI), with the phase-out for single filers beginning at $75,000 ($110,000 for joint filers). This meant that taxpayers needed to calculate their adjusted gross income, add back in certain deductions, and then for every $1,000 over the $75,000/$115,000 threshold, they had to reduce the $1,000 per child credit by $50. An individual filer with two children making $40,000 over the $75,000 threshold would have to drop their available credit by $2,000, taking it down to nothing.

 

All that has changed significantly in 2018: the credit itself has increased to $2,000 while the earned income requirement has dropped to $2,500. Perhaps most importantly, the threshold amounts have increased dramatically: it jumped from $75,000 to $200,000 for single filers and from $115,000 to $400,000 for joint filers. Though the amount that will be available as a refund is limited to $1,400, it is still a considerable advantage that will be extended to many more families than it previously had been.

 

The new tax law also introduced a family tax credit for those who have older children who are still dependents. Families whose children are 17 or older will get a $500 credit for each child who has aged out of the child tax credit. Though this credit is not refundable at all, it provides additional help for families still supporting their older children. Both the family tax credit and the child tax credit will expire in 2025, though it is always possible for it to be renewed or extended.

 

  1. Tax Deferred Savings

When you put money that you earn into a special tax-deferred retirement account, you effectively reduce your overall income. If you are able to put enough away, you not only can end up owing less in taxes by virtue of being in a lower tax bracket, but also have the positive impact of having funds grow on a tax-deferred basis that will be available to you when you retire. One of the most popular of these types of accounts is the 401K, a program offered by employers. If a 401K is available to you, there are certain steps that you need to take to make sure that you are using it to your best advantage. These include:

  • Making sure that you are maximizing any matching funds that your employer offers.
  • Contributing as much to the fund as you can afford to. 

 

Tax deferred savings are not reserved for employees. Those who are self-employed can avail themselves of similar types of accounts known as SEPS (Simplified Employment Pensions) or individual (vs. employer-sponsored) 401K plans.

 

  1. IRA Accounts

If you can take advantage of a traditional Individual Retirement Account, you’ll get much of the same benefit as is offered by a 401K tax deferred account. Unfortunately, not everybody is eligible as a result of various restrictions that have been placed on them. They are not available to higher income taxpayers who have workplace retirement accounts (and their spouses. Lower income people who have workplace accounts can make IRA deposits or partial deposits depending upon their income.

 

If you are eligible to open an IRA, there are also limitations on how much you can deposit in a given tax year. For those who are under the age of 50, the limit is $5,500, while those who are 50 and above are able to contribute up to $6,500. However much you deposit each year will be deducted straight off of your taxable income, no matter what your filing status.

 

  1. Health Savings Accounts

Regardless of whether you get your health insurance through your workplace or you purchase it on your own, it’s a good idea to open a Health Savings Account. These are savings vehicles into which you can deposit pre-tax money. Though the intended use of these accounts is the payment of medical expenses, including items like co-pays, deductibles, dental and vision costs and other out-of-pocket expenses not covered by insurance, the way that they are set up provides taxpayers with the opportunity to minimize taxes three ways. The first way is through the deposit itself: monies deposited into an HAS are not subject to tax of any kind, whether local, state, federal, or even FICA. Once in the account, your money is tax-deferred, and any withdrawals that are taken in order to pay for medical expenses are tax free. People who are focused on getting the maximum benefit from these accounts will deposit as much as they can and then leave the money untouched, opting to pay for health expenses with cash on hand that has already been taxed. Doing so may go against the original intent of the account, but it allows you to get the greatest possible tax-deferred growth.

 

  1. Flexible Savings Accounts

Much like the HSA account, a Flexible Savings Account allows you to set aside up to $2,550 each year for deductibles an other qualified health expenses. The cash is deposited pre-tax, effectively reducing the amount of income you have to pay tax on, but it’s different in that the cash must be used by year’s end or else you forfeit it entirely. Despite its name, it is not a savings account as much as a tax savings account. Depending upon your employer’s policies, you may be allowed a grace period if you don’t use all of the funds within the tax year, and some employer programs permit up to $550 to be rolled over into the next year’s account.

 

  1. Open Your Own Business

If you’ve long dreamed of becoming an entrepreneur, the new tax reform laws offer another good reason to go for it: people who own their own businesses (sole proprietors) and others with pass-through income who use Schedule C (such as Limited Liability Corporations and the owners of S corporations) are entitled to a dramatic new tax break. They are able to lower their taxable income by deducting 20% of qualifying earnings prior to calculating how much they owe the government. This can take a business owner from one tax bracket to the next lower bracket, though not all businesses are able to take advantage of the savings. There are phaseouts for single filers whose income is more than $157,500, and for those filing using a married filing joint return the phase out threshold is $315,000.

 

  1. Education Tax Breaks

If you’ve been longing to expand your education, whether in your own field or in a different one, under the new tax law your employer is able to offer you up to $5,250 of educational assistance that will not be taxable to you as a benefit and will not be reflected on your end-of-year earnings statement. This is true whether you pursue undergraduate or graduate level education. Alternatively, if you are self-employed or employed and your employer doesn’t offer educational assistance, you are able to pay your own way for graduate level classes or other training and get a 20% credit on up to $10,000 of qualifying expenses under the Lifetime Learning Credit. There’s a phase out for this credit that kicks in once your income is over $57,000 or $114,000 for those using the married filing jointly tax status.

These seven items are just the most obvious benefits introduced under the tax reform act. You may be eligible for other credits and refunds depending upon your specific situation.

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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