Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.
According to the cocktail napkin
scribblings that is the “framework” for tax reform currently being touted by
arrogant demagogue Donald T Rump, one of the very few itemized deductions that
will remain will be the deduction for home mortgage interest.
I do believe that the deduction for
acquisition debt interest (but not home equity debt interest) for a taxpayer’s
primary principal residence should be kept (as well as the deduction for state and local income and property taxes).
Not to support the housing market, but as part of an attempt at “geographical
What do I mean?Americans are taxed based on income measured
in pure dollars.But the “value” of
one’s level of income differs, sometimes greatly, based on one’s geographical
location.A family living in the northeast
(New York, New Jersey, Massachusetts, and Connecticut) or California with an
income of $150,000 may be just getting by, while a similar family that resides
in “middle America” lives like royalty on $150,000. Many components of the Tax
Code are indexed for inflation, but nothing is indexed for geography.
It costs an awful lot to live in the
northeast and California. State and local income and property taxes are the
highest in the country. The cost of real estate is also excessively high, and
so acquisition debt is higher. As a result, one must earn a lot more money to
be able to live in these states – and so salaries are arbitrarily increased to
reflect the higher cost of living.Since
we pay taxes on “net income” after deductions, allowing an itemized deduction
for these items would help to somewhat geographically equalize the tax burden.
In my opinion, the current deduction
for mortgage interest – both on Schedule A and Form 6251 (Alternative Minimum Tax) is perhaps the area of
the Tax Code where proper documentation and strict adherence to the law is
the most overlooked (or actually ignored).
Let’s take a look at the current
deduction for mortgage interest.
“Qualified residence interest” on debt
secured by a residence, aka mortgage interest, that is paid on your primary and
secondary residences may be deductible on Schedule A.But just how much can you deduct?It depends.
There are three types of qualified
residence interest debt -
1) Grandfathered debt – debt acquired
on or before October 13, 1987, that was secured by a main residence or a
qualified second home.It does matter
what the proceeds of the loan were used for, as long as the debt was secured by
the property.The interest deduction is
not limited.Interest on grandfathered
debt is deductible in full as mortgage interest.
2) Acquisition debt - debt acquired
after October 13, 1987, that was used to buy, build, or substantially improve a
main residence or a qualified second home. A “substantial improvement” is one
that adds value to the home, prolongs the home’s useful life, or adapts the
home to new uses.You can deduct the
interest on up to $1 Million in principal ($500,000 if Married Filing
Separately). Qualified acquisition debt cannot exceed the cost of the home and
any substantial improvements.
3) Home equity debt – debt acquired
after October 13, 1987, that is secured by a main residence or a qualified
second home that is not used to buy, build, or substantially improve the
property.There is no restriction or
limitation on what the money can be used for; you can use it to buy a car, to
pay for college, or to pay down credit card balances.You can deduct the interest on up to $100,000
($50,000 if married filing separately).
Only grandfathered debt interest and
acquisition debt interest is deductible in calculating the dreaded Alternative Minimum
Tax (AMT).Home equity debt interest is
NOT deductible for AMT.
Taxpayers are required to keep separate
track of acquisition debt and home equity debt, to make sure that the deduction
on Schedule A does not include interest on debt principal that exceed the
statutory maximums, and to determine what interest deduction to add back on
Form 6251 when calculating Alternative Minimum Taxable Income.However, I firmly believe that 99.5% of
taxpayers do not do this.I do not know
of any taxpayer who does.And I expect
that the majority of tax preparers do not do this for their taxpayer clients.
The cocktail napkin scribblings do not
indicate if the entire current deduction for mortgage interest – both acquisition
debt and home equity debt – or the current limitations based on debt principal will
I have created a MORTGAGE INTEREST
GUIDE.In it I explain just about
everything you need to know about deducting qualified residence interest on
your Form 1040.It includes two worksheets
– one for Acquisition Debt Activity and one for Home Equity Debt activity – and
a detailed example of how to use the worksheets.
My MORTGAGE INTEREST GUIDE is only
$2.00 delivered as a pdf email attachment - or $3,00 for a print version sent
via postal mail.Order your copy by
sending your check of money order payable to TAXES AND ACCOUNTING, INC, and
your email or postal address, to -
TAXES AND ACCOUNTING, INC
MORTGAGE INTEREST GUIDE,
POST OFFICE BOX A
HAWLEY PA 18428
So, what are your thoughts on the
deduction for mortgage interest?
* Have you ever
thought about becoming a professional tax preparer? If the answer is yes you
should check out my book SO YOU WANT TO BE A TAX PREPARER.Click here to read a review.And click here to order a copy in e-book
format you can read on Kindle.
* I have talked often about how ending the
federal Estate Tax might result in the end of the step-up in basis of inherited
assets, which would be a total disaster for tax preparation.Daniel
Berger suggests another result from eliminating the “death tax” in “The Unintended Consequences of Killing the Estate Tax” at TAX VOX, the blog of the
Tax Policy Center -
there are other considerations to repealing the estate tax. One is that many
wealthy people use charitable giving while alive or through bequests to reduce
or eliminate their estate tax liability. In the mid-1940s the bequests of Henry
Ford’s sons made the Ford Foundation the largest philanthropy in the world, and
in 2014 businessman Ralph Wilson Jr. left $1 billion to his charitable
foundation. In 2015, charitable bequests amounted to around $20 billion
it is not possible to know how the estate tax affected any individual bequest,
nor should the generosity of these gifts be minimized, there is evidence to
suggest that the existence of an estate tax does effect decisions to leave
charitable bequests and increases lifetime giving.
economics are relatively simple. Each dollar bequest to charity lowers the size
of the taxable estates by a dollar, and reduces the amount of estate tax
liability by as much as 40 cents. Eliminating the estate tax would make leaving
money to charity more “expensive”, compared to current law. The same logic
follows with lifetime giving. If a high-income household claims an itemized
deduction for a charitable contribution on its income tax, the gift will lower
its current tax bill and at the same time the contribution will reduce the
amount of money that might eventually be subject to the estate tax.”
This is certainly something to think about
when evaluating the fate of the Estate Tax.I have not been a fan of the Estate Tax, but to be honest, at current
levels it only affects at most 2 or 3 of my clients.
triggering higher inflation in August and September, the storms may have
boosted the expected increase in benefits in 2018 by the most in six years. The
annual COLA, or cost-of-living adjustment, could be as much as 2% versus the
1.6% to 1.8% increase that seemed likely a few months ago.”
* FORBES.COM’s TaxGirl Kelly Phillips Erb
deals with a little-understood tax form in her “Ask the TaxGirl” post “Should I Cancel A Form W-9?”
— tax professionals and all us individual taxpayers — should be cautious when
we receive any tax or financial-related unsolicited emails.”
I personally never “open” an email from an
address I do not know.I do sometimes
miss legitimate emails from clients and their representatives whose email
addresses are not familiar to me – but it is more better to miss an email than
to FU your computer or open yourself up to identity theft.
I also know that email addresses can often be
hacked, as mine has been on occasion, so I use either the subject line as a
guide to determine if I will open an email from a client, or evaluate the
“body” of the actual email before clicking on any links.
that a ruling by the Seventh Circuit Court of Appeals would apply to ministers in that circuit, which includes the states of
Illinois, Indiana, and Wisconsin. It would become a national precedent
binding on ministers in all states if affirmed by the United States Supreme
Court--an unlikely outcome because the Supreme Court accepts less than 1
percent of all appeals. Note, however, that the IRS would have the discretion
to follow or not follow an eventual ruling by the appeals court nationally to
promote consistency in tax administration.”
So, this decision does not directly affect my client in Maryland yet.But the “fat lady has not sung” yet – and
there may be further developments on this issue in the future.
it comes to time to actually use the money you’ve saved, be sure that you know
the laws and are utilizing your 529 savings in the most efficient way possible.
If you have specific questions, it never hurts to speak to an accountant that’s
familiar with 529 plans.
your college savings work for you!”
* FREE! FREE! FREE! New tax e-newsletter -
TAX TOPICS.Check it out!
doing away with all itemized deductions except mortgage interest and charitable
contributions, as it is thought the “framework” for tax reform does, would
certainly simplify the Tax Code, it would, in some instances, be unfair.
look at the deduction for “employee business expenses”.
employers have established an “accountable” plan for reimbursing employees for
these expenses.If an employee incurs a
legitimate job-related out-of-pocket expense he/she submits proof of payment to
the employer and is reimbursed.
others, especially outside commission salesmen, are not reimbursed for the
expenses incurred to generate sales.The
employer pays the employee a draw and a commission based on sales volume.The employee is expected to “eat” his out of
pocket expenses, which could be extensive in terms of business miles, meals and
entertaining, and promotional expenses.
the case of the reimbursed employee, his net salary is, in effect, all “in-pocket”.In the case of the unreimbursed employee his
net “in pocket” is his net salary less his unreimbursed expenses.And the salary of the unreimbursed employee
is usually higher due to the “unreimbursementness”.The unreimbursed employee is being more
highly taxed than the reimbursed employee.
the commission salesman was self-employed instead of an employee he/she would
be able to deduct in full all related expenses, and pay tax, income and
payroll, on the true “in pocket”.
the unreimbursed employee can claim a tax deduction for his/her expenses on
Schedule A, although this is limited by the 2% of AGI exclusion for “miscellaneous”
expenses.FYI, back when I started in “the
business” (early 1970s) outside salesmen could deduct unreimbursed expenses as
an “Adjustment to Income”.
the other hand, allowing employees a deduction for business automobile expenses
that includes depreciation is perhaps excessive and unfair.
the most part taxpayers who use their car for business, other than commuting,
would own a car whether or not one was needed for business. The business use,
however extensive, is basically secondary to personal use.I own a car. I have always owned a car.Although a large percentage of my current
driving is business related (because since I work out of a home office I have
no “commute”), I own the car primarily for personal and not business reasons,
and would own a car whether it was needed for business or not.
the standard mileage rate for business is calculated using an annual study of
fixed and variable costs of operating an automobile - including insurance,
repairs and maintenance, tires, gas and oil, and depreciation. For example, the
2016 business standard mileage rate of 54 cents per mile included 24 cents
allocated to depreciation.
because the main reason for purchasing a car is personal and not business,
depreciating the cost of purchasing the car, based on business use, is not
really a true business expense.Only the
business use percentage of actual operating expenses should be allowed as a
deduction – because the more miles you drive the more you spend for gas, oil,
repairs and maintenance, tires, and probably insurance.
to be more representative of the actual out of pocket business expense the 2016
standard mileage allowance should have been 30 cents per mile – the 54 cents
less the 24 cents for depreciation.This
would apply on both Form 2106 and Schedule C.
the case of motor vehicles used 100% in a business, a deduction would be allowed for 100% of the
actual costs of maintaining and operating the vehicle, including depreciation. In
this situation perhaps the standard mileage allowance should not be allowed.
Every person has a unique tax situation.No two tax returns are the same.Your situation is different from other taxpayers.Not every question has the same answer for
every taxpayer.The actual correct
answer to just about every tax question, except “Should I cheat?” – is “It
Now, on to the BUZZ.
* Leandra Lederman
makes some very good points about the alleged “IRS Scandal”, which TAX PROF
Paul Caron tells us in now in its 1600+ day (I agree with fellow blogger Peter
J Reilly that the Professor has most certainly “jumped the shark” with this
blog post series) in “The Real IRS Scandal” at the SURLY SUBGROUP blog -
“The fact that IRS employees were using keywords to identify progressive
as well as conservative organizations doing too much political activity to
qualify under 501(c)(4) should have been clear to anyone who dug into the
public documents. But it wasn’t the message that the House Oversight
Committee–and thus many media stories–disseminated. The real scandal was the
damage the resulting witch hunt did to the IRS.”
There was no IRS scandal.IRS employees were doing their “due
diligence” in investigating the organizations applying for 501(c)(4) status
(organizations “for the promotion of social welfare”).Tea party related organizations should have
been closely investigated, as well as more “politically liberal” organizations,
which also were.
The unacceptable and
inappropriate act was not by the IRS, but by the idiots in Congress who
continually underfund the IRS as “punishment”.
PDA is correct when he says, “It’s important for your overall financial
well-being to understand your taxes,” even if you use a tax professional to
prepare your return.I have said for
years that the more informed you are on
taxes the better prepared you will be when you see your preparer at tax time.A good reason to “subscribe” to THE WANDERING
TAX PRO (see upper right-hand margin).
* This week’s Monday post at THE TAX
PROFESSIONAL asks “Is Silence Golden?”.Be sure to return there on Wednesday for an interview with the President
In the post the Professor also exposes
arrogant Trump’s obvious “pants on fire” lie that the “plan” does not help him
rate cut helps him. Also, he likely holds his vast business operations in many
different types of entities including partnerships and S corporations and will
benefit from the top rate of 25% on such income even after paying himself
reasonable compensation. Also, if he is still carrying forward a net operating
loss, repeal of the AMT helps him. And repeal of the estate tax is a tremendous
tax cut for him.”
“ . . .
the IRS urges tax professionals and their clients — and all of us who do our
taxes on our own, too — to assume that some tax identity thief somewhere has
our personal and financial information should continue to monitor our accounts
and credit reports.”
* FREE! FREE! FREE! New tax e-newsletter -
TAX TOPICS.Check it out!
Most of you know that
in 45 years I have never used flawed and expensive tax preparation software to
prepare a tax return, and so have never electronically submitted a federal
return.It is not because I oppose
electronic filing – but because I cannot do so without using software.
The requirement is
that tax preparers must submit electronically returns that they “file”.The word “file” in this context means
“mail”.RWW is correct when he says in
the below post-
“It’s still possible in some cases to file on paper by having your
preparer give you your return for filing.”
I have all my clients
sign a statement, which I keep with my file copy of the return, that says –
“I do not want to file my return electronically and choose to file my
return on paper forms.My preparer will
not file my return with the IRS.I will
file my paper return with the IRS myself.”
Before leaving for
Intuit David Williams, the IRS tax-preparer regulation “czar”, specifically
told me that what I was doing was ok – and that I did not have to submit my
returns electronically or include the Form 8948 with each return if the client
signed my statement.
THE LAST WORD
Everything I feared would
happen if arrogant demagogue Donald T Rump became President has come true.
Every single day the
idiot continues to prove that he was the worst possible candidate for President
– or for any elected official.
September 29, Trump signed into law H.R. 3823, the "Disaster Tax
Relief and Airport and Airway Extension Act of 2017".
disaster relief component of this Act makes temporary changes to the Tax Code
for individuals and businesses who were affected in –
Hurricane Harvey disaster area on or after August 23, 2017,
Hurricane Irma disaster area on or after September 4, 2017, and
Hurricane Maria disaster area on or after September 16, 2017.
eliminates the current requirement that the allowable deduction for net
casualty losses from the above disasters must be reduced by 10% of Adjusted
eliminates the current requirement that taxpayers must itemize deductions on
Schedule A to claim a casualty loss deduction for the above disasters (the
deduction will be treated as an additional Standard Deduction – and this additional
deduction will be allowed in calculating the Alternative Minimum Tax);
provides an exception to the 10-percent early retirement plan withdrawal
penalty for premature distributions related to hurricane relief for the above
allows for the re-contribution of retirement plan withdrawals for home purchases
cancelled due to the above disasters;
provides flexibility for loans from retirement plans for qualified hurricane
relief for the above disasters;
temporarily suspends the 20%, 30% and 50% limitations on charitable
contribution deductions to qualified organizations associated with hurricane
relief for the above disasters made before December 31, 2017;
creates an “Employee Retention Credit” of 40% of wages (up to $6,000 per
employee) paid for employers that conducted an active trade or business in the
above listed disaster areas on the date of the disaster and the active trade or
business for which was rendered inoperable for some period of time following
the disaster; and
allows taxpayers to use earned income from 2016 to calculate the 2017 Earned
Income Tax Credit and Child Tax Credit.
begins by comparing the scribblings on a cocktail napkin that is the current
tax “plan” with the initial presentation of tax reform proposals that
eventually became the Tax Reform Act of 1986 -
“. . . but the elderly curmudgeon in
me can't resist reflecting on how comprehensive tax reform was handled in 1986.
In 1984, the Treasury issued the two volume, Tax Reform For Fairness,
Simplicity, And Economic Growth (Vol. 1. Vol. 2) .All in it was over 700 pages.The Unified Framework is nine pages.Only it kind of looks like the nine pages you
would get if a kid were assigned a ten page paper, figured he could get away
with turning in nine, but realized he didn't have even nine pages of material
and thought of every possible way to stretch it.”
then goes on to address one of the cocktail napkin scribblings, described in
the 10-page paper as -
“The framework limits the maximum tax rate
applied to the business income of small and family-owned businesses conducted
as sole proprietorships, partnerships and S corporations to 25%. The framework
contemplates that the committees will adopt measures to prevent the
recharacterization of personal income into business income to prevent wealthy
individuals from avoiding the top personal tax rate.”
“first heard about the concept of a
special rate for pass through entities about six years ago”.His response –
“I thought then it was one of the stupidest
ideas I had ever heard, and continue to think that.”
said above I also oppose this scribbling from the Trump “framework”.Small business earnings should not be taxed on the Form 1040
differently from salaries and other “ordinary income”.
not oppose lowering the corporate income tax rate, although I have suggested a
better idea in “Something to Think About”.
“C” corporation income is taxed twice – first at the corporate level and second
when dividends are distributed to shareholders.Lower income taxpayers pay 0% tax on “qualified” dividends, so there is
some relief from double-taxation, but those with higher incomes pay 15% or
20%.This is less than the corresponding
tax rates on ordinary income, but it is still double-taxation.Pass-through income from sub-S corporations,
as well as self-employment income from partnerships and sole proprietorships,
are taxed one time on the Form 1040 as ordinary income.
you work for someone else, including your own C corporation, you receive a W-2
and your wages are taxed as ordinary income.If you are self-employed, either reporting income expenses on a Schedule
C or a partnership return, you do not receive a W-2 and your net income is
taxed as ordinary income, and losses reduce ordinary income.
you are a shareholder in a sub-S corporation you receive a W-2 for your salary,
or at least should if you are actively involved, which is taxed as ordinary
income, and the balance of the corporation’s net income is taxed on your Form
1040, also as ordinary income.This is
true whether or not you actually receive a distribution, the equivalent of
C-corporation dividends, from the sub-S activity.
purpose of the sub-S corporation appears to be primarily to avoid the
double-taxation of corporate income for small corporations (to be a sub-S
corporation you cannot have more than 100 shareholders).Before the creation of the LLC it was also a
way to get some of the limited liability protection available to corporations
for the self-employed, who would otherwise operate as a sole proprietor or
partnership with full liability, while maintaining the tax benefits of a
Schedule C or partnership.
most sub-S corporations are “professional corporations” – those owned by
licensed professionals such as attorneys, architects, engineers, accountants, physicians,
etc.Professional “C” corporations pay
federal income tax on net income at a flat rate of 35%. Pass-through income is taxed on the Form 1040
at between 10% and 39.6%, depending on the shareholder’s level of income.Under existing tax law, the pass-through
income from a sub-S professional corporation is often actually taxed at a lower
rate than the C corporation flat 35% tax rate.
kind of funny aside, the IRS takes opposing positions on the “appropriateness”
of the salary paid to the owner(s) of a one or few person corporation depending
on whether the corporation is a “C” or an “S”.In the case of a “C” corporation the IRS tries to say that the salary
paid is too high, to create dividends that are doubly-taxed.With a “S” corporation the IRS tries to say
that salary paid is too low, to reduce the amount of net profit that is “passed-through”
and avoids payroll taxes.
the self-employed sole-proprietor or partner no salaries are paid to owners.A Schedule C filer and partners pay tax at
ordinary income rates on the entire net profit from the business activity –
much of which is really the equivalent of W-2 earned income.But these individuals also get a full tax
deduction (although limited in certain situations due to basis and “at-risk”)
for a net loss, reducing other income taxed at ordinary rates.C corporations get to carry back or forward
any net losses to reduce net income taxed at C corporation rates.
Schedule C and partnership and sub-S K-1 income at a lower rate could make those
who work for someone else pay more tax on their earned income than those who
are self-employed.And the tax
differential would most certainly disproportionately benefit higher income
taxpayers – those who would be taxed on W-2 income at the new 35% rate.It is obvious that this would result in
higher income taxpayers creating pass-through entities for income that
otherwise would be reported as W-2 income to avoid taxes big-time.
my corporate tax reform proposal, which calls for a dividends-paid deduction, I
would think there would be less need for sub-S corporation status.There would be no double-taxation to be
avoided, and LLC status would provide limited liability protection.
separate issue, self-employed sole-proprietors and partners are currently treated
unfairly in the area of self-employment tax (the equivalent of FICA tax for
you have a corporation for your self-employment activity you pay yourself a
salary, on which you pay FICA tax.You
claim a corporate tax deduction for employer paid health insurance and pension
contributions.If your salary is
$100,000 and your health insurance and pension deductions total $25,000 you are
only paying FICA tax on $100,000.
you are a sole-proprietor or partner you still get a deduction for your health
insurance premiums and pension contributions, but as an “adjustment to income”
reducing Form 1040 net taxable income and not
as a deduction against self-employment income.You begin calculating the self-employment tax on $125,000 of income.So the sole-proprietor and partner will pay
more FICA-equivalent self-employment tax than the corporate employee pays FICA
tax on the same net income.
this too confusing?Any questions?What do you think?