WHERE THE FAKAWI - JUST SO YOU KNOW

It appears that U.S. Representative Sean Casten (IL) and Rep. Lauren Underwood (IL) introduced the Taxpayer Extension Act to give taxpayers an additional five weeks, until May 20, to file their individual tax returns for 2018. The congressional representatives stated that the proposal was due to the five-week government shutdown that prevented taxpayer assistance.

No movement has been made on this proposal since it was introduced last week.

Regardless of whether this bill passes or not – I will stop work on 2018 Form 1040s on April 14^th – April 13th if the filing season is not extended - and will not return to working on tax returns until April 23^rd the earliest – at a much more relaxed pace.

Returns not in my hands with all the necessary information by Monday, March 18^th will not be worked on until this April 23^rd date.

TTFN

WHERE THE FAKAWI – NUMBER ONE

An early entry to address an issue receiving a lot of press recently

Just like the rest of the country, some of my clients are getting smaller refunds this year.  But the number to compare on your 2018 and 2017 tax returns is NOT the refund, or balance due, amount but the TOTAL TAX amount.  This is the number on Line 15 of the 2018 Form 1040 and Line 63 of the 2017 Form 1040, or Line 39 of the 2017 Form 1040A.

Your refund is a factor of your withholding.  It not a reflection of any change in your tax liability – the actual income tax you are paying.  In February of 2018 the IRS revised the income tax withholding tables to reflect the changes made by the GOP Tax Act.  It appears the IRS was too “liberal” in its revisions – perhaps instructed to do so by the government to make it look like you were saving more from the tax changes.  The problem is compounded when you have several sources of income from which federal income tax is withheld. 

With my clients, I specifically noticed substantial decreases in withholding from NJ state pensions.

The IRS realized its FU and has slightly revised the way it calculates the penalty for underpayment of taxes as a token response.

Two important points -

(1) The additional amount received in each weekly paycheck as a result of the revised withholding is NOT a true indication of the savings from the GOP Tax Act. 

(2) The fact that this year’s refund is less than last year does not mean you are paying more tax under the GOP Tax Act.

If your 2018 income is basically the same as 2017 and your refund is $2,000 less than last year, or you actually owe Sam $1,000 when you got back $1,000 in 2017, but your federal income withholding was $3,000 less than last year YOU HAVE PAID $1,000 LESS IN FEDERAL INCOME TAX.  You got an extra $3,000 from Sam during the year and now have to give $2,000 of this “loan” back.

The trouble with getting an extra $50 or $60, perhaps more than you should be getting based on reality, in your paycheck each week is that you spend an extra $50 or $60 each week and end up with surprise when your refund is less than it was last year. 

The real issue here lies in the fact that the criteria for claiming federal withholding allowances has completely changed with the GOP Tax Act.  The current Form W-4 on file for most taxpayers is no longer relevant.  The IRS has attempted to revise the Form W-4, but has not been very successful.

Back to the 1040s!

TTYL

THE TWELVE DAYS OF TAX SEASON

And now what you have been waiting a year for – my annual posting of:

THE TWELVE DAYS OF TAX SEASON

On the first day of tax season my client gave to me a Closing Statement for the purchase of a home.

On the second day of tax season my client gave to me 2 W-2 forms.

On the third day of tax season my client gave to me 3 mortgage statements.

On the fourth day of tax season my client gave to me 4 Salvation Army receipts.

On the fifth day of tax season my client gave to me 5 Form K-1s.

On the sixth day of tax season my client gave to me 6 1099s for dividends.

On the seventh day of tax season my client gave to me 7 cancelled checks.

On the eighth day of tax season my client gave to me 8 useless items.

On the ninth day of tax season my client gave to me 9 medical bills.

On the tenth day of tax season my client gave to me 10 stock sale confirms.

On the eleventh day of tax season my client gave to me 11 employee business expenses (despite being no longer deductible).

On the twelfth day of tax season my client got from me a finished tax return, 11 employee business expenses, 10 stock sale confirms, 9 medical bills, 8 useless items, 7 cancelled checks, 6 1099s for dividends, 5 Form K-1s, 4 Salvation Army receipts, 3 mortgage statements, 2 W-2 forms, and a Closing Statement for the purchase of a home.

And, of course, on the thirteenth day of tax season the client gave to me a corrected Consolidated 1099 from Wells Fargo Advisors!

--------------------

And so, the 2019 Tax Filing Season – my 48^th - officially begins.  Open the floodgates and bring on the 1040s!

As is my custom, due to the demands of the filing season I will be taking my annual “tax season hiatus” from posting to THE WANDERING TAX. 

Between now and April 15th I will barely have time to relieve myself let alone blog!  Nor will I have time to respond to comments. If a comment requires a response I will do so after April 15th.

DO NOT EMAIL ME OR SUBMIT COMMENTS WITH SPECIFIC QUESTIONS ABOUT YOUR 2018 TAX RETURN!  ALL SUCH ITEMS WILL BE PROMPTLY DELETED UPON DISCOVERY!

I am NOT accepting any new 1040 clients (or any other kind of tax preparation clients). So, don’t email me asking if I can prepare your 2018 tax returns.  THE ANSWER IS A MOST DEFINITE "NO". 

I will be publishing a WHERE THE FAKAWI post occasionally here at TWTP to keep my clients up-to-date on my progress during the season and to report changes or additions to my tax season policies and procedures. Clients can also keep track of my tax season progress by following me at TWITTER (@rdftaxpro).

I realize that I am abandoning you at a time when you may need me the most – but I need to make a living!

I find it a bit amusing that the period of time when TWTP gets the most “hits” is during the tax filing season when I am not posting.

“Talk” to you when it is all over!

TAFAW 

THE 2019 TAX FILING SEASON

Public Law 115-97 – officially “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” - also known as “The Tax Cuts and Jobs Act”, but best described as the GOP Tax Act - takes effect with the 2018 federal income tax returns that have begun to be filed. 

This new law has drastically changed the United State Tax Code.  For tax years 2018 through 2025, or until new tax legislation is enacted, the GOP Tax Act will affect every income tax return filed.

The GOP Tax Act is the Republican equivalent of the Democrat’s Obamacare.

Both Acts were based on a good concept that dealt with a legitimate issue – making adequate health care more affordable for and accessible and providing needed tax reform.  But the main purpose of passing both Acts was to get an early legislative victory for the Party’s newly elected President.  Both were written hastily and poorly, the GOP Tax Act practically overnight, without serious thought or discussion.  And were voted on hastily, without serious debate. 

In both cases, none of the members of Congress who voted on these Acts, from both Parties, actually read the legislation they were voting on.  They were told how to vote by the leaders of their respective Parties, and for the most part the members obeyed.

And both Acts contained some good and some bad, perhaps more bad than good.

Obamacare required insurance companies to provide coverage for pre-existing conditions, and provided taxpayers with a tax credit directly applied to monthly premium payments to reduce the out of pocket cost, but created an excessive financial penalty for not having health insurance coverage, added the NIIT surtax to investment income and created other nickel and dime taxes, fees and charges, and made health insurance premiums age-based.

The GOP Tax Act did contain some simplification via the elimination and limitation of tax deposits, some good and some bad, increased the Standard Deduction, reduced tax rates, and effectively did away with the dreaded Alternative Minimum Tax, but it also contained much new and unnecessary complexity.  It was neither tax reform nor tax simplification.  Thankfully the popular title properly identified it as “tax cuts” and not “tax reform”.   

The Act will make the preparation of some Form 1040s simpler, but also make many more involved and more costly.  Taxpayers in many situations should not be surprised when they discover the fee to prepare their returns is higher than in past years.  

Taxpayers should also not be surprised if their refunds are smaller than expected, or if they actually owe money with the filing of their 2018 Form 1040.  Many have been under-withheld, some seriously.  The Government Accountability Office recently reported that, based on simulations run by the Treasury Department, taxes for at least 30 million Americans — 21 percent of taxpayers — are being under-withheld.

The new withholding tables issued last February were a bit too “liberal”, so workers would think the GOP Tax Act was actually putting more money in their pockets.  And the loss of the personal exemption deduction and many itemized deductions makes previously submitted W-4 forms no longer appropriate.  The IRS has provided some token relief for this under-withholding by revising the calculation of the penalty for underpayment of estimated taxes.

As I have said in the past, the more I learn about the GOP Tax Act the more I find –

(1) There is still a lot we don’t know yet about how many of the provisions of the Act will be interpreted and implemented.

(2) Because the Act was basically written overnight, the wording of the law is often defective, confusing and unclear.  “Technical corrections” legislation is clearly needed.

(3) It is very obvious that those who actually write tax law and the members of Congress who vote on it have absolutely no concept of the practical implementation of the tax legislation they write and pass, or of the actual preparation of tax returns.

So, good luck with the preparation and filing of your 2018 Form 1040.  And be sure to return here after the end of the filing season to read my annual “That Was The Tax Season That Was” post.

TTFN

WHAT’S NEW FOR 2018 TAX FORMS – NEW YORK

While the 2018 New York state income tax instruction booklets have been available for weeks now, the actual 2018 IT-201 and IT-201 are finally up at the NYS Department of Taxation and Finance website.  Click here for IT-201 and here for IT-203.

I did a quick review of the 2018 tax returns and there does not seem to be any changes in the format or content of these forms.  They look exactly the same as the 2017 forms.

The big news for 2018 New York state returns is that New York has “decoupled” from most of the individual income tax changes enacted by the GOP Tax Act.

Like many states, New York bases the state individual income tax return on the federal return, starting with the federal AGI and making state adjustments, and allowing the same itemized deductions claimed on the federal Schedule A with some state adjustments.  The GOP Tax Act made multiple changes to the federal AGI and the federal Schedule A.  New York State will not allow most of these changes in calculating state income tax liability.   

(1) New York continues to allow a deduction for all qualified job-related moving expenses and an exclusion from taxable wages of employer reimbursements for these expenses.  There is a new “subtraction modification” on the IT-201 and IT-203 to reduce federal AGI for qualified employee moving expense reimbursements included in federal taxable wages and out of pocket non-military employee moving expenses. 

(2) Withdrawals from a Section 529 Qualified Tuition Program account for kindergarten through 12^th grade tuition payments are not considered qualified withdrawals for determining the taxability of distributions under the New York 529 college savings account program.

(3) While the New York Standard Deduction amounts have been slightly adjusted for inflation, they have not been as substantially increased as the federal Standard Deduction amounts have been.  And New York still allows a $1,000 deduction for each dependent claimed on the 2018 IT-201 or IT-203 (but not for the taxpayer or spouse).

(4) The 2018 New York Itemized Deductions are computed using the federal rules as they existed prior to the enactment of the GOP Tax Act.  The deduction for property taxes is not limited to $10,000, acquisition debt interest on principal of up to $1 Million is deductible regardless of when the home was purchased, and home equity interest on up to $100,000 in principal, all casualty and theft losses, and all previously allowed Miscellaneous expenses, still subject to the 2% of federal AGI limitation, are deductible on the 2018 NY state return.  And the old “Pease” limitation of itemized deductions will be used in calculating NY itemized deductions.   

(5) New York will allow you to itemize on your 2018 NY State IT-201 and IT-203 regardless of whether you itemized deductions or claimed the Standard Deduction on your 2018 federal Form 1040.  In the past If you took the Standard Deduction on your federal return, or if you did not have to file a federal return, you were required to take the New York Standard Deduction.  You could only choose to claim itemized deductions on your NY state return if you itemized on your federal return, and you would claim the same amount of itemized deductions on the NY return that you claimed on the federal return, with some state adjustments, additions and subtractions. There is a new Form IT-196 (New York Resident, Nonresident, and Part-Year Resident Itemized Deductions) that replaces Forms IT-201-D and IT-203-D.

Many tax preparers, myself included, told some clients last year that they would no longer be able to itemize and did not need to maintain and give them documentation for certain expenses for 2018 through 2025.  However, if the client lives or works in New York State they do need to maintain and provide their preparer with details of these expenses for 2018 and beyond.

There have been other changes to NY state taxes for 2018 -

(1) A special “Union dues additional adjustment” can be included in your New York Itemized Deductions for any portion of union dues paid that is not included in Form IT-196 Line 28 “Job expenses and certain miscellaneous deductions” due to the 2% of AGI exclusion.  So, in effect 100% of union dues are deductible.  The adjustment is Item K for the entry on Line 44 of Form IT-291) (see the Form IT-196 instructions).   

(2) The New York State Child and Dependent Care Credit has been increased and enhanced.  The credit amount allowed increased for taxpayers with New York AGI of at least $50,000 but less than $150,000, and, the qualified expense limit for taxpayers with more than two qualifying persons increased to $7,500 for three qualifying persons, $8,500 for four qualifying persons, and $9,000 for five or more qualifying persons.

(3) There have been some adjustments to old credits and some new credits that do not apply to any of my clients and probably most of you.

As an aside, just so you know, beginning with 2019 New York will not follow the changes to alimony enacted by the GOP Tax Act.  All alimony received is included in taxable income and all alimony paid is deducted from taxable income for calculating the NY state tax liability, regardless of when the divorce or separation decree or agreement was issued or amended.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

Here is the last BUZZ installment before my annual tax season hiatus.

A reminder – don’t forget to return here on February 1^st for the annual posting of THE TWELVE DAYS OF TAX SEASON.

* Trump’s government shutdown is over but the WASHINGTON EXAMINER reported “Government watchdog warns IRS could take a year to recover from shutdown”. -

“The National Taxpayer Advocate, a government watchdog office that monitors the IRS, told House staffers that it would be 12 to 18 months before the agency resumes normal operations, sources told the Washington Post.

The IRS will return from the shutdown behind schedule for training IRS employees and to 5 million letters from taxpayers that have so far gone unanswered, the Post reported. The tax agency also needs to hire thousands of employees for the tax filing season, House aides said.”

* Kelly Phillips Erb reports “2019 Tax Refund Chart Can Help You Guess When You'll Receive Your Money”.

As you can see from the chart in the post requesting direct deposit of your federal refund will put the money in your pocket 4 days sooner.

And be advised, according to the IRS “the earliest EITC/ACTC related refunds to be available in taxpayer bank accounts or debit cards starting February 27, 2019, if these taxpayers chose direct deposit and there are no other issues with their tax return.”  So, if you mail out your Form 1040 claiming either the Earned Income Credit or an Additional Child Tax Credit (the refundable portion of the credit) today you probably won’t get your refund until the beginning of March.

* Kay Bell explains “Donor advised funds and donation bunching get renewed interest in wake of tax reform” at DON’T MESS WITH TAXES.

Using a Donor Advised Fund to “bunch” charitable deductions is a good idea – and one of the tax planning techniques to use in response to the changes made by the Tax Cuts and Jobs Act that I discuss in my book THE GOP TAX ACT AND THE NEW 1040.

*  Did you buy your first home in 2018, or planning to do so in 2019.  Check out another of my books - TAX GUIDE FOR NEW HOMEOWNERS.

* William Perez tells you everything you need to know about LLCs in “Small Business LLC Taxes & LLC Tax Returns [+ Free Checklist]” at FIT SMALL BUSINESS.  

THE LAST WORD:

It is proven again and again every day that everyone involved in the Trump campaign, including Trump himself, has lied to everyone.  Many have been indicted – and I expect more indictments are coming.

And Trump continues to lie to everyone about everything every day as President, as do his “stooges”.

The fact that the Republican Party has totally ignored these proven facts, and refuses to denounce and disavow Trump, is a clear sign that the Grand Old Party has abandoned all of its former principles and has lost all integrity, credibility and legitimacy.

Patriotic Americans must vow to never again vote for a candidate of the Republican Party.

A new, truly conservative-based party, one that will oppose and denounce Trump and all he represents, must be created to take the place of the dead Republican Party.

Let us all pray that by the end of the tax filing season, when I return to posting here at TWTP, Trump has resigned, is removed from office, or proceedings have begun to remove him from office.

TTFN

READ MY LIPS!

I often see blog posts and online articles that identify IRS “red flags”, more frequently during the tax filing season.  These posts tell you that if you claim a certain deduction or credit your tax return will have a greater likelihood of being chosen for audit by the IRS.

I don’t like these “red flag” posts and articles.

Read my lips –

Do not fail to claim a legitimate, documented tax deduction or credit on your federal or state income tax return just because you read somewhere that it is an IRS “red flag” and that claiming it will automatically result in an IRS audit.

(1) If your deduction is legitimate and you have sufficient documentation to prove its authenticity in an audit then what is the problem? An audit is not something that must be avoided at all costs – it is merely an inconvenience.

(2) Just because the IRS pays closer attention to tax returns that contain certain deductions or credits does not mean if you return contains this deduction of credit you will “automatically” be audited. The IRS only audits a small percentage of 1040s (less each year as Congress continues to underfund the IRS) – and several factors are involved in determining which returns are selected for audit.

(3) If you fail to claim a legitimate deduction or credit you have, in effect, audited your own return and disallowed the deduction – neither of which the IRS may actually do.

(4) Just because you read somewhere that an item is an IRS “red flag” does not mean that the item is really an IRS “red flag”.

I must add that if the alleged “red flag” deduction or credit is legitimate and documented, but another item on your return is not, an IRS audit might turn up the “questionable” item. The answer is obviously to claim only items that are legitimate on your tax return, and be sure to have sufficient documentation for all deductions and credits you claim. 

FYI - in my 45+ years in “the business” I expect I have prepared over 10,000 sets of tax returns.  I can count on the fingers of my two hands the number of traditional IRS office audits I have had to deal with over the years – none of which have been in the past 20+.  And many of the 10,000+ returns have included deductions and credits which are thought to be “red flag” items. 

TTFN

WHAT’S NEW FOR 2018 TAX FORMS – NEW JERSEY

The instructions for the 2018 NJ-1040 is now available to download at the NJDOT website.  Click here.

Both the NJ-1040 form and the instruction booklet have been totally rewritten. 

The cover of the instruction book is the same, but almost everything inside is different.  The revised instruction book is, in my opinion, far superior to the old one.

While as of this writing the actual 2018 NJ-1040 and supplemental schedules are still not available on the NJDOT website (although the instructions are – is a puzzlement), NJ taxpayers have begun to receive the 2018 NJ-1040 booklet in the mail, and a client scanned and emailed me a copy of the new 2018 forms.

The 2018 NJ-1040 is four pages – the old NJ-1040 was only three pages.  And the numbering of the entries has been revised.  The content of the NJ-1040 has not changed, other than a change in the way the deduction for exemptions is calculated on Page 1 and to add lines for the two new credits I identify below and some additional voluntary contribution options.  Taxpayers, and paid preparers, now sign on the bottom of Page 4 instead of Page 1. 

Above the signature on Page 4 is a new section where taxpayers must indicate whether or not the taxpayer and spouse, civil union partner or domestic partner have health insurance on the date you file the return.  Filling in, or not filling in, the ovals in this section will not affect in any way the 2018 NJ-1040 – I expect those who do not fill in the appropriate ovals will receive correspondence from the state later in the year discussing health coverage options.  As I explained in detail in my earlier post “The NJ Health Insurance Mandate”, beginning January 1, 2019, New Jersey will require its residents to maintain health insurance, and will penalize residents who do not, or who do not qualify for an exemption.

As with the new instructions, the revisions to the NJ-1040 are, in my opinion, an improvement.

The old one-page Schedule A and Schedule B, which had nothing to do with the federal Schedules A or B, has been replaced by Schedule NJ-COJ (Credit for Income or Wage Taxes Paid to Other Jurisdictions) and Schedule NJ-DOP (Net Gains or Income From Disposition of Property), now on separate pages.  As with the NJ-1040, the actual content of the schedules has not changed.  The NJ-COJ is just bigger in size, and the NJ-DOP listing of individual sales adds many, many more lines for entries.

I have not seen the 2018 NJ-BUS-1 and NJ-BUS-2, but I expect there is no change to these schedules.

The one-page NJ-1040-H, for NJ taxpayers who are not required to file a NJ-1040, is now a two-page NJ-1040-HW.  Part I on the front page is to claim the refundable Property Tax Credit and Part II on the back is to claim the new refundable Wounded Warrior Caregivers Credit discussed below.

Here is what is new for NJ state individual income taxes for 2018 -

(1) A new top tax rate of 10.75% is created for NJ taxpayers with income of more than $5,000,000, regardless of the taxpayer’s filing status.

(2) The Pension Exclusion and Retirement Income Exclusion combined for NJ taxpayers age 62 or older or disabled under Social Security with Total Income of less than $100,000 is –

Single or Head of Household = $45,000

Married Filing Joint = $60,000

Married Filing Separate = $30,000

(3) The maximum deduction for property taxes is increased from $10,000 to $15,000.

(4) There is now a non-refundable state Child and Dependent Care Credit for families with qualified dependents and New Jersey Taxable Income of less than $60,000 who are allowed to claim the federal Child and Dependent Care Credit.   

A qualifying individual can be a child under age 13 or a spouse or dependent who lived with the taxpayer for more than half the year and is physically or mentally incapable of self-care.

The amount of the New Jersey credit is a percentage of the taxpayer’s federal Child and Dependent Care Credit and is based on New Jersey Taxable Income -

If NJ taxable income is:       The NJ-1040 credit is:

Not over $20,000                50% of federal credit

over $20,000 to $30,000    40% of federal credit

over $30,000 to $40,000    30% of federal credit

over $40,000 to $50,000    20% of federal credit

over $50,000 to $60,000    10% of federal credit

The maximum New Jersey credit cannot exceed $500 for one qualifying individual or $1,000 for two or more qualifying individuals.

(5) The NJ Earned Income Tax Credit is 37% of the federal tax credit.

(6) There is a new refundable Wounded Warrior Caregiver Credit for a taxpayer with NJ gross income of less than $100,000 who provided care for a relative who is a qualifying armed services member.

A qualifying armed services member is a person who:

* was honorably discharged or released under honorable circumstances by the last day of the tax year, and

* has a disability arising from active U.S. military service in any war or conflict on or after September 11, 2001, and

* has either a 100% disability rating or receives individual unemployability benefits, and

* lived with you in New Jersey for at least six months of the tax year.

The credit is the lessor of 100% of the federal veteran disability compensation or $675.  It is calculated on a new Schedule NJ-WWC.

This credit, like the NJ Earned Income Tax Credit, is refundable.  As with the NJEITC, this credit is included in “Total Withholdings, Credits and Payments” on the NJ-1040.  If qualified caregivers have no NJ state income tax liability, or claiming the caregiver credit reduces their liability below 0, they will receive the full credit or the difference in their refund. 

(7) New Jersey will not allow the highly publicized and highly convoluted and complicated federal 20% Section 199A deduction for “pass-through” business entities, including federal Schedule C or C-EZ filers, on the NJ-1040.

2018 is the 2^nd year that honorably-discharged veterans can claim a special additional $3,000 exemption on the NJ-1040.  If you provided the NJ Division of Taxation with documentation of your honorable discharge last year you do not have to include the documentation again with your 2018 return.

For those of you who file your NJ-1040 free online using NJWebFile, the NJDOT website tells us - “The NJ WebFile application will begin accepting 2018 NJ Tax Returns on or about Wednesday, January 30, 2019”.

Once again, the NJ Division of Taxation will be taking steps to protect New Jersey taxpayers from refund fraud and identity theft.  These efforts will, like last year, result in state tax refunds not being issued until March 1.

I will let you know when the actual 2018 forms and schedules are available online at the NJDOT website.

TTFN