JUST SAYING – INCREASING THE MARRIAGE TAX PENALTY

There has been much talk about the effects of the limited $10,000 - $5,000 if Married Filing Separately -  itemized deduction for property taxes and state and local income or sales taxes combined in the GOP Tax Act. 

However, something that has not been mentioned, at least in what I have read, is the fact that this limitation substantially increases the Marriage Tax Penalty.

Two working single individuals, either living together or separately, who itemize can each claim a deduction of up to $10,000 in combined property taxes and state and local income or sales taxes.  That is a total of $20,000 in itemized deductions on the 2 returns. 

For residents of New Jersey, where my clients are from, it is not hard for each individual to reach the $10,000 maximum, or come close to it, even if they both own and live in one home.

If these two individuals, who both work and have their own separate income, were married the itemized deduction would still be limited to $10,000.  Filing separately would not make any difference, as everything I have read specifically identifies the limitation as $5,000 for married taxpayers filing separate returns. 

So, by having joined together in holy wedlock this dual-income couple will probably be paying tax on $10,000 more in net taxable income, which would, again in New Jersey, result in over $2,000 in additional federal income tax.  This tax penalty could be increased if the state tax return follows the federal return.   

I wonder if this is what the idiots in Congress intended.  Of it they actually gave the matter any thought.

Just saying.

TTFN

IF YOU CAN HAVE A ROTH IRA YOU SHOULD HAVE A ROTH IRA

If you are able to make contributions to a ROTH IRA you should use a ROTH IRA account as your current savings account.

Contributions to a ROTH IRA are never deductible on your federal or state income tax returns.  But earnings on money held in a ROTH IRA account can eventually be totally tax free to both you and your beneficiaries.

Here is what you need to know about a ROTH IRA -

* The maximum amount you can contribute to a ROTH IRA, a traditional IRA or a combination of ROTH and IRA accounts for 2018 is $5,500.   If you are age 50 or older you can contribute an additional $1,000.

* You can contribute to a Roth IRA at any age as long as you have earned income from a job or from self-employment.   You do not have to stop making contributions at age 70½ if you still have earned income.

* The amount of your allowable contribution to a ROTH IRA is phased out and eventually eliminated based on your Adjusted Gross Income (AGI).  The AGI phase-out range for taxpayers making contributions to a ROTH IRA for 2018 is -

$120,000 - $135,000 = Single and Head of Household

$189,000 - $199,000 = Married Filing Joint and Qualifying Widow(er)

$0 - $10,000 = Married Filing Separate

* You can withdraw your contributions at any time without taxes or penalty.  All withdrawals are considered to come from contributions first. 

* You must hold the Roth account for at least five years and be at least 59½ before you can withdraw earnings tax-free and penalty-free.  The 5-year period begins on the first day you make your first ROTH contribution.

* You never have to take any withdrawals from a ROTH IRA in your lifetime.  There are no annual required minimum distributions beginning at age 70½.

As long as you never touch the accumulated earnings on your ROTH IRA investment, and withdraw only your contributions, you can take money from this account at any time over the years without any tax cost.  And your accumulated earnings will grow to a nice retirement nest egg, or legacy for your beneficiaries, if invested wisely.

You have contributed $10,000 to a ROTH IRA over the past couple of years, which has accumulated earnings of $2,000.  You need $5,000, or as much as $10,000, to pay for an extraordinary medical bill, or for needed home repairs, or to pay for your child’s college education.  You can take the $5,000 - $10,000 from your ROTH IRA account without any tax consequences.

Here is another good idea – If your son or daughter has a summer job you should consider opening up a Roth IRA account for him or her.

To qualify for an IRA your child must have earned income — wages or net earnings from self-employment.  Money you give your child for doing chores around the house doesn’t count, but earnings from babysitting or mowing lawns may qualify.

You can contribute 100% of your child’s earnings to the account, up to the $5,500 maximum. If your son earns $2,400 for the summer you can contribute $2,400 to a Roth IRA for him. If he earns $6,500 you can contribute $5,500.

There is nothing in the tax code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.  You can use your own money to fund the IRA contribution and let your child keep his earnings.

You can use a Roth IRA to encourage your children to work or to save. If your son earns $5,000 in a part-time job, open a Roth IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a Roth, match it and put in another $2,500.

If you put the maximum into a Roth each year for your 16-year-old from 2018 through 2023, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.

One caveat - there exists a potential problem with opening a Roth account for a child. Once the child reaches the “age of majority,” usually 18, he/she will have full access to all the funds and can “take the money and run.”

One last thing - the earlier in the year you contribute to your, or your children's, ROTH IRA, the more money you will accumulate tax-free at retirement.  So make your 2017 (if not already done) and 2018 ROTH IRA contribution today.

TTFN

LOOKING FOR A TAX PROFESSIONAL?

Do you need to find a qualified and competent tax professional to prepare your 2017 income tax returns?  Here is some advice from my website FIND A TAX PROFESSIONAL (click in the title highlighted in blue) –

CHOOSING A TAX PROFESSIONAL

DON’T ASSUME (my annual, perhaps controversial, very important warning)

ALPHABET SOUP (explaining what all the “initials” have to do with preparing a Form 1040)

WHAT TO ASK A POTENTIAL TAX PREPARER

WHAT TO GIVE YOUR TAX PREPARER

YOU ARE RESPONSIBLE

The last item – YOU ARE RESPONSIBLE – is very important.  Regardless of who prepares your return you are ultimately responsible for all the information reported on your return!

And while we are talking about preparing your 2017 returns - here is more very important advice – don’t rely on a “box” to prepare a correct tax return!

Have you seen the tv ads for Turbo Tax?  They are the most stupid things I have ever seen. 

Please remember - No software package, or online filing service, is a substitute for knowledge of the Tax Code.  And no tax software package, or online filing service, is a substitute for a competent, experienced tax professional.

As with any software program the rule is "garbage in - garbage out". If you don't know how to enter the information, or what information to enter, you will not get the best, or even a correct, answer.

IRS statistics indicate that taxpayers using do-it-yourself tax software spend an average of between 6 and 10+ hours longer preparing their tax returns (depending on the number of worksheets and schedules) than taxpayers who do manual calculations. Further, the IRS estimates that do-it-yourself software users spend an average of 10 to over 20 hours longer on the return than if they used a paid tax preparer, again depending on the returns’ complexity.

When the IRS comes after you for errors on your tax return you can’t blame it on the software. The US Tax Court has on several occasions rejected the "Turbo-Tax Defense" when a taxpayer attempted to blame tax preparation software for a negligent tax return.

You don’t save any time or get any added guarantees of accuracy.  Paying a competent tax professional to do your return is ultimately much cheaper than taking a chance with a tax software package or an online service!

TTFN

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

The tv ads from Henry and Richard have started.  Of course, it had nothing to do with H&R’s ability to competently and accurately prepare tax returns – just “come in and get a check”.  Thankfully it did not feature the idiot in the bowtie.  It appears that Block is also offering some free online tax preparation – MORE ZERO – so they can sell your information to 3^rd party advertisers.

And the Turbo Tax tv ad with the knitted teddy bear is perhaps the stupidest thing I have ever seen – dumber than Henry and Richard ads.  Other TT ads I have seen are no less ridiculous.

* A reminder to journalists and bloggers of my annual Very Important Message.

* My fellow bloggers have joined me in posting about the year in taxes 2017 -

Kay Bell shared her list of the “Top 10 tax issues of 2017” at DON’T MESS WITH TAXES.

Professor Paul Caron, aka the TAX PROF, listed "The Top 10 Tax Posts of 2017" from his blog.

* Tony Nitti’s first “Tax Geek Tuesday” post of 2017 dealt with “Changes To Depreciation In The New Tax Law”.

* This week’s post at THE TAX PROFESSIONAL – "A Little This-A, A Little That-A". 

* JD SUPRA reports “Treasury Inspector General Warns Taxpayers Of IRS Impersonators As Tax Filing Season Approaches”.

“The IRS generally first contacts people by mail – not by phone – about unpaid taxes, and the IRS will not ask for payment using a prepaid debit card, a money order, or wire transfer.  The IRS also will not ask for a credit card number over the phone. If you get a call from someone claiming to be with the IRS asking for a payment, here’s what to do:

If you owe federal taxes, or think you might owe taxes, hang up and call the IRS at 800-829-1040.  IRS workers can help you with your payment questions;

If you do not owe taxes, fill out the “IRS Impersonation scam” form on TIGTA’s website, www.tigta.gov, or call TIGTA at 800-366-4484;

You can also file a complaint with the Federal Trade Commission at www.FTC.gov.  Add “IRS Telephone Scam” to the comments in your complaint.”

* I have said often that the new GOP Tax Act will cause states to revise their individual tax systems.  The NY POST tells us “New York Could Restructure Tax Code to Dodge Effects of New Tax Law”.   

The article quotes Governor Andy Cuomo –

“We are developing a plan to restructure our tax code to reduce reliance on our current income tax system and adopt a statewide payroll system.” 

* FYI – I have publicly posted my details of what true tax reform legislation should have looked like here.

THE FINAL WORDS

You don't need a book to tell you Donald T Rump is an ignorant, incompetent and mentally unstable buffoon.

You just need to read his tweets and listen to him speak.

TTFN

WHO MUST FILE A 2017 TAX RETURN?

Do you have to file a 2017 tax return?  Let’s review.

Generally, you do not have to file a federal 2017 Form 1040, or 1040A, unless your “gross income” is at least -

Single = 10,400

Single, Age 65 or Older = 11,950 

Head of Household (with one dependent) = 17,450

Married Couple = 20,800

Family of 4 = 28,900

Married Couple, One Spouse 65 or Older = 22,050

Married Couple, Both 65 or Older = 23,300

“Gross income” means –

“All income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2014 or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly).” 

Gross income includes gains, but not losses, reported on Form 8949 or Schedule D.  If you are a sole proprietor filing a Schedule C, gross income is the amount reported on Line 7 of Part 1 – gross receipts less returns and allowances and cost of goods sold plus “other income”.  And if you are a landlord gross income includes the gross rents reported on Schedule E.

So, you see that the filing requirements are not based on actual "net" taxable income.  For any type of business income or capital gains the income before deducting any expenses or deducting the cost basis of investments sold is counted.  You must file a return to identify the expenses and cost basis.

You must file a tax return for a dependent if any of the following applies –

*  unearned income is more than $1,050

* earned income is more than $6,350, or

* gross income is more than the greater of $1,050 or the sum of $350 and the individual's earned income (total not more than $6,350).

Regardless of your gross income, you generally must file an income tax return if -

* you had net self-employment income of $400 or more,

* you owe household employment taxes,

* you owe additional taxes on premature retirement plan distributions

* you failed to take a required minimum distribution from a retirement plan,

* you must repay the 2008 Homebuyer Credit,

* you owe Social Security and Medicare taxes on unreported tip income, or

* you received an advance payment on the Premium Tax Credit.

And, whether or not you are required to do so, you should file a tax return to get a refund of tax withheld or to take advantage of a refundable tax credit like the Earned Income Credit or the Additional Child Tax Credit.

Another reason to file a tax return, even if you are not legally required to do so, is to start the clock running on the normally 3-year statute of limitations for IRS audit or review of a return. 

The numbers for individual state income tax returns differ.  You may not have to file a federal return, but you must, or should, file a state return.  For example, the State of Pennsylvania is a gross income tax with no personal exemptions or standard, or itemized, deductions.  You must file a PA-40 and pay the 3.07% flat state income tax if “you received total PA gross taxable income in excess of $33”. 

Any questions?  Ask your, or a, tax professional.  To find a qualified tax professional in your area go to FIND A TAX PROFESSIONAL.  Whatever you do, do not email me.  I am no longer accepting any new clients.  

Want to know “What’s New In Taxes for 2017”?  Click here.  

TTFN

SIMPLIFICATION AND COMPLEXITY FOR TAXPAYERS

While the GOP Tax Act adds much unnecessary complexity to the Tax Code, it does make some things simpler.

By eliminating the miscellaneous deductions subject to the 2% of AGI limitation, taxpayer recordkeeping is simplified.  Employees who are not reimbursed for their job-related expenses under an accountable plan will no longer need to keep track of business mileage, business meals and entertaining, and other employee business expenses.  And there is no longer the need to keep track of job-seeking expenses, including travel to interviews, or educational expenses to maintain or improve skills required in your current trade or business.  Investment and tax preparation costs are no longer deductible, so no longer a need to keep track of these expenses.  Of course, this simplification comes at a cost – the loss of a potentially large tax deduction.

The Act changes tax planning considerations, and makes year-end planning simpler.

To begin, with the increased Standard Deduction, unfortunately made much less attractive for taxpayers without dependents due to the loss of the personal exemption deduction, there will be less taxpayers who will benefit from itemizing.

For those who could be able to benefit from itemizing –

* It will still be possible to “bunch” medical expenses and charitable contributions – that is claim additional deductions in a year when you may be able to itemize, so that you itemize every other year.  The use of a charitable donor-advised fund account and contributions of appreciated stock at year-end will still apply.  And during the year, the Qualified Charitable Distribution (click here) is an even more attractive strategy for those age 70½ and over.

* With the limitation of the itemized deduction for combined property and state and local income or sales taxes to $10,000, there is little that can be done here, other than to attempt to maximize the deduction.  If the $10,000 maximum will not be already met, it is still a good idea to make any 4^th quarter state estimated tax payment in December instead of January of the next year.  And pre-payment, if possible, of property taxes can be used to bunch deductions. 

* One can still make a 13^th mortgage payment to bunch the interest deduction.

* The total elimination of job related, investment, and tax preparation expenses, and other miscellaneous deductions subject to the 2% of AGI exclusion, makes these deductions no longer an issue, so there is nothing more than can be done.

* And the changes to the dreaded Alternative Minimum Tax (AMT) will create less victims, so AMT considerations will no longer apply for most.

While the new limitations on the mortgage interest deduction simplifies the Tax Code, it greatly complicates recordkeeping for taxpayers and potentially for tax professionals.  Under the GOP Tax Act interest on home equity debt, regardless of the amount of the debt principal, is no longer deductible.  Period.  There is grandfathering of existing acquisition debt interest rules – but there is NO grandfathering of existing home equity debt.  Taxpayers will need to separately track acquisition and home equity debt going forward, and going back to day one on all current mortgage debt! 

I do believe in the original House version of the bill all existing mortgage debt was “grandfathered” – including home equity debt.  While I can understand, and agree with, the philosophy of limiting deductible mortgage interest to acquisition debt, for practicality sake I wish that existing home equity debt had been included in the grandfathering.

Taxpayers have always been required to keep separate track of acquisition and home equity debt, but few actually did due to the allowance of a deduction for interest on up to $100,000 of home equity debt.  This is now something that MUST be done, especially for taxpayers with existing mortgages.

Even if a homeowner never incurred any separate home equity debt – never took out a separate home equity loan or opened a home equity line of credit – if an original acquisition mortgage was ever refinanced they may have home equity debt.  The additional closing costs of each refinance that were added to the principal of the refinanced mortgage loan is home equity debt.  The only way you would avoid home equity debt in such a situation is if you literally refinanced only the principal from each old mortgage and paid all closing costs in cash.

For example - you purchased a home in 2011.  You have had only one mortgage, from the original purchase, and no home equity debt.  You refinanced the original mortgage in 2015 to get a better rate.  The principal balance on the original mortgage was $197,374.  The principal balance of the refinanced mortgage was $200,000.  You did not take any money “out”, and paid a little over $1,000 at the closing.  The difference is the closing costs for title insurance, inspections, fees, etc. etc.  You have have acquisition debt of $197,374 and home equity debt of $2,626.   

I will be rewriting my Mortgage Interest Guide, which includes worksheets for keeping track of mortgage debt and a detailed example of how to use them, to reflect the new rules for 2018 and beyond.  It is only $2.00, delivered as a pdf email attachment.  I will let you know here when it is available.

So, as you can see, not only has the Tax Code been drastically changed by the new GOP Tax Act, but also the year-round recordkeeping requirements of taxpayers.

TTFN

A VERY IMPORTANT MESSAGE FOR JOURNALISTS AND BLOGGERS

This post, which I issue every year at this time, is for all of the journalists and bloggers out there.

When writing about taxes this filing season DO NOT advise your clients to ask, consult, contact, or talk to your CPA or a CPA!

The correct advice is – ask, consult, contact, or talk to your or a tax professional.

The mere existence of the initials “CPA” after a person’s name does not in any way, shape, or form indicate that he or she knows his or her arse from a hole in the ground when it comes to preparing 1040s.

A particular CPA may indeed be competent and experienced in preparing 1040s, and many are, but it is only because of the education, training, experience, and other factors that are unique to that specific individual, and has nothing whatsoever to do with the initials “CPA”. 

And that specific individual is just one of your many choices among tax professionals.

Got it?

TTFN

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

The first BUZZ of 2018!

* As you begin the year be sure to check out my recent post “Starting the New Year Off Right”. 

* On December 31^st Russ Fox announced “The 2017 Tax Offender of the Year”.

An interesting choice.

* No surprise here.  The FINANCIAL TIMES observes “Tax overhaul adds to IRS challenges amid cuts.” -

“The agency has been dealing with real-terms funding cuts of 21 per cent since 2010, according to figures from the Centre on Budget and Policy Priorities, and Mr Trump’s March budget proposed an additional reduction of $239m. Staffing is down 21,000 since the start of the decade.”

The item quotes fellow tax blogger Daniel Shaviro, a professor of taxation at New York University School of Law -

“The workload the IRS faces is going to be huge.  The new pass-through rules will be a gigantic project for starters, and the international rules are also a brand new system . . . What makes it worse is many in Congress are not interested in helping them.”

The idiots in Congress continue to give the IRS unnecessary and inappropriate work – administering Obamacare and other social welfare programs like the EITC – while at the same time continuing to reduce the agency’s budget.  Implementing the multiple changes and new complexities of the GOP Tax Act will be a complicated and difficult, and expensive, task for the IRS

* I look forward to fellow tax bloggers joining me in looking back at the year in taxes 2017.  Of you haven't seen it yet click here for my review.

* From ACCOUNTING TODAY – “TIGTA warns taxpayers to be on alert for IRS scammers”.

* A good and timely warning, considering what Kay Bell, the yellow rose of taxes reports at DON’T MESS WITH TAXES – “IRS impersonators have stolen more than $61 million and the tax scammers are not through”.

* Need any more proof that Donald T Rump is a delusional idiot?  Here is some from ACCOUNTING TODAY – “Trump brags he knows taxes ‘better than the greatest CPA’”.

* Of course, we know that just because a person has the initial CPA after his or her name does not mean he or she is an expert, or even knowledgeable, in 1040 taxes.  See my article “Don’t Assume” at FIND A TAX PROFESSIONAL.

Next week the BUZZ returns to Mondays.

TTFN

HAPPY NEW YEAR!

LET US PRAY THAT 2018 

BRINGS THE REMOVAL 

OF MENTALLY UNSTABLE 

MALIGNANT NARCISSIST 

DONALD T RUMP 

FROM 
THE WHITE HOUSE!