IT IS WRONG!

The excessive “due diligence” requirements forced upon tax preparers by Congress is wrong.

Let’s face it – it is truly “passing the buck”.  Congresscritters are lazy.  If Congress is faced with a tax law that is being extraordinarily abused or misused rather than dealing with the problem and fixing or changing the individual deduction, credit or loophole it passes the responsibility down to tax preparers.

First the Earned Income Credit, then the Child Tax and American Opportunity Credits, and now the Head of Household status.  Coming soon – when a divorced parent with joint legal custody claims a child as a dependent we will be required to make periodical unannounced “bed checks” during the year.

Tax preparers obviously must perform basic “due diligence” in preparing a tax return, or in helping anyone complete a government form or application.  We must not purposefully and knowingly lie on the form or application.

If a person filling out a government form or application tells us that he is an African-American, or has blonde hair and blue eyes, we cannot put that information on the form or application when our eyes tell us the person is white or has brown eyes and hair.

If we know from personal experience, observation, or from information from a third party, that a client has a side-line business doing home repairs we must report that business on the client’s return – or refuse to prepare the return.  If a client living in Hoboken wishes to claim a grandchild as a dependent, but we have personal knowledge that the child lives with an aunt and uncle in Swedesboro, we cannot claim that child as a dependent, or we must refuse to prepare the return.

But that is where it ends.  If we have no personal knowledge to the contrary, or no reason to suspect the veracity based on what we see or have seen or know or have been told, we must believe the client is telling the truth.  The IRS audits tax returns - as it has the right to do so and should have the right to do so - but we do not.

If a person tells us his blood type is A-, or that he had steak for dinner the night before, we are not required to take blood samples or view restaurant records and videos to verify the assertion.

As I have said time and again, the tax preparation industry truly needs an organized national lobby in Washington to combat attempts by Congress and the IRS to turn us into Social Workers, and to otherwise protect our interests.

TTFN

MAKING ONE BILL OUT OF TWO

So, the Senate passed its version of the Tax Cuts and Jobs Act.  It now must be reconciled with the House version in conference committee.

Considering the importance of this development I have postponed the regular Monday BUZZ for a day.  This week’s installment will be posted tomorrow (Tuesday).

Whenever I talk about the GOP tax plans I feel I must make these preliminary comments –

(1) It is NOT as good as Republicans tout and NOT as bad as Democrats insist.  The bills have BOTH good and bad in them.

(2) It is NOT a MASSIVE tax cut for the middle class.

(3) It most certainly IS a MASSIVE tax cut for arrogant arsehole Donald T Rump and his family.

Let’s discuss the items of difference in the two bills that affect most 1040 filers.  In this analysis I am not considering the “appropriateness” or potential economic effects of the changes in the bills.

In the interests of full disclosure, I must state that the below discussion is not based on a personal reading of the official texts of the passed Senate or House legislation, but on what I have read in a multitude of online news articles, analyses and blog posts from reputable and credible sources.

Tax Rates:

The House version has 4 tax brackets going from 12% to 39.6%, with a “phantom” 5^th bracket that apparently “phases-out” the effect of the 12% bracket.  The Senate version has 7 brackets from 10% to 38.5% period.

Obviously, I prefer 4 brackets to 7 – keep it simple, stupid.  But without any convoluted phase-out.  If I had my druthers I would make the bottom rate 10% and the top rate 38.5%, but would accept the 12% and 39.6% rates.  

Standard Deduction:

There is a minimal difference in the amounts in the 2 bills, with the House being $200 for Single, $300 for Head of Household, and $400 for Married Filing Joint more.  From the point of view of my clients, I would prefer the higher numbers, but would accept the Senate amounts.

Child and Family Tax Credits:

The House child credit is $1,600, maintaining the current age 17 as the cut-off and beginning the phase-out for joint filers at AGI of $230,000, and the “family” credit for the taxpayers and other dependents is $300.  The Senate credit for a child is $2,000, but raises the cut-off age to 18 and begins the phase-out for joint filers at $500,000, with a $500 credit for all others.

I would want the higher numbers for both of the credits, and the higher age cut-off for the child credit.  I would accept a compromise on the AGI phase-out levels, perhaps somewhere in the middle.  I would want the family credit to include the taxpayer and spouse.

Medical Deduction:

The House does away with the itemized deduction for medical expenses.  The Senate keeps it and reduces the AGI exclusion threshold back to 7.5% for 2017 and 2018.

Most of my clients do not receive any federal tax benefit for their medical expenses, due to the AGI exclusion.  However, a few do benefit, some consistently and some occasionally, and those that benefit consistently are retired seniors.  I could accept the repeal of this deduction if it meant keeping preferred options in other areas.  

Home Deductions:

Both versions allow for a deduction for real estate taxes paid up to a $10,000 maximum, not limited to the taxpayer’s one primary personal residence.  And both maintain a deduction for interest on acquisition debt, at least in the House version limited to a taxpayer’s one primary personal residence, and do away with the deduction for interest on new home equity debt.  But the House reduces the maximum acquisition debt principle to $500,000, while the Senate keeps the current $1 Million.

I would want both the property tax and acquisition debt mortgage interest deductions limited to one primary personal residence, and would prefer the lower House limitation on acquisition debt principle.

Educator Expenses:

The House does away with the $250 adjustment to income for the qualified out of pocket expenses of K-12 teachers, aides and administrators.  The Senate keeps the adjustment and doubles the amount to $500.

Both bills do away with the deduction for employee business expenses.  This adjustment is an employee business expense.  I have always had issues with this item.  Why are teachers singled out for this minor deduction?  What about other public service employees – police officers, fire fighters, emergency medical technicians, nurses?  I support the House bill’s repeal of this item.

Education Credits:

As I understand it, the House bill does away with the Lifetime Learning Credit, but the American Opportunity Credit remains and is available for a 5th year of post-secondary education at half the rate that applied for the first 4 years, with up to $500 being refundable.  I also think the income phase-out range has been increased.  I have seen nothing yet about the education credit(s) available in the Senate version. 

I would certainly hope that the final conference committee bill includes the same enhancements to the AOC as the House bill.  While I oppose using the Tax Code to deliver government tax benefits, if doing away with the education tax credit(s) is not replaced by corresponding increased direct student financial aid I would prefer that at least the AOC, with the House enhancements, remain.

ACA Individual Mandate:

The Senate version makes the penalty for not having “sufficient” health insurance for the entire year $0.  The House makes no change to the current law. 

I have always opposed the individual mandate penalty.  While the government should encourage universal health insurance coverage, and provide financial assistance to help pay for premiums via the advance premium credit, it should not financially penalize those who do not have “sufficient” insurance for all household members for the entire year.

Alternative Minimum Tax:

The House totally repeals the dreaded AMT, but the Senate merely raises the current exemption amounts by about 40%.

The AMT must be destroyed!  I do not want any individual Alternative Minimum Tax included in the final legislation sent to idiot Trump for signature.

Pass-Through Business Income:

Both versions add much complexity to the Tax Code and would provide much agita for tax professionals. 

I would prefer, and could support, a 70% wage equivalent - 30% dividend equivalent allocation of net income (with no option for a different allocation based on “facts and circumstances”), instead of the flat percentage deduction in the Senate bill, for sole proprietors filing Schedule C and general partners receiving a Form K-1, with only 30% subject to a lower income tax rate and only 70% subject to the self-employment tax.  And I actually could accept a lower maximum rate on sub-S pass-through business income.  The lower rate would be comparable to the current lower tax rates for qualified dividends.  

Equipment Expensing:

Both versions allow a full current expensing of all machinery and equipment purchases for 5 years; the Senate version phases out this deduction over a second 5 years.  The House increases the Section 179 expensing deduction to $5 Million with the phase-out beginning at $20 Million of total purchases.  The Senate increases 179 expensing to $1 Million with the phase-out starting at $2.5 Million.

I would go with the House for the 5-year limit for full expensing and the Senate for the increased Section 179 numbers.  I do, however, oppose the idea of full expensing of all machinery and equipment purchases.

Estate Tax:

Both versions currently substantially increase the exemption, $10 Million in the House and double in the Senate.  The House bill totally repeals this tax after 6 years.  The House version maintains a consistent full step-up in basis for all inherited assets.

While I oppose the “death tax” on a philosophical level, I would accept a $10 Million exemption, with current “portability” intact, while not totally repealing it.  My main concern is insisting on the consistent full step-up in basis for all inherited assets.

International Business Income:

I have absolutely no knowledge of or experience with the issues of international business income and repatriation that are covered in the two bills.  These issues do not affect, and never have affected, any of my clients.  So, I cannot intelligently comment on these components of the legislation.  Anyway, they do not directly affect the filing of the Form 1040.

Sunset:

The individual tax cuts in the Senate bill expire in 2026.  The corporate rate reduction is permanent, but does not take effect until 2019.  In the House version the $300 per taxpayer/spouse "family credit" expires in 2023.

I have always been against temporary tax law, except in the case of tax relief related to natural disasters, or tax law changes that “sunset” after 10 years.  Any changes to tax law must be permanent.  If Congress wants to change things in the future they can do so via new legislation.  I could accept the later beginning date for reducing the corporate tax rate. 

UPDATE:

I have done additional reading on the Senate tax bill provisions.  Here are some more comments -

In the Senate bill personal casualty and theft losses are only deductible if attributable to Presidentially-declared disaster areas.  I think the House bill does away with the deduction altogether going forward.

I would prefer the Senate version and allow for a deduction for disaster-area casualty losses.

The Senate bill reduces the recovery period (the depreciable life) for residential real estate from 27.5 years to 25 years, and for nonresidential real property (commercial buildings) from 39 years to 25 years.  I do not think the House version makes any change.

Those of you who have read my tax reform proposals know that I oppose the deduction for depreciation of real estate, and capital improvements thereto, PERIOD.  I certainly do not want the depreciable life of real estate, regardless of the use of the property, to be shortened, and oppose the Senate changes.

The Senate version does away with the ability of taxpayers to “recharacterize” ROTH IRA contributions as traditional IRA contributions.  I do not think the House makes this change (though I am not certain).

I oppose doing away with recharacterization.

There you have my 2+ cents on the reconciliation of the two tax bills.  So, what do you think?

TTFN 

THIS JUST IN - CONGRESS ACTUALLY DID SOMETHING!

To quote a frequent exclamation of the recently passed Jim Nabors’ popular tv character Gomer Pyle – SURPRISE! SURPRISE! SURPRISE!  The Republicans were actually able to finally pass a bill in both the House and the Senate, despite the handicap of having arrogant idiot Donald T Rump in the White House!

Early this morning the Senate approved its version of the Tax Cuts and Jobs Act by a vote of 51 to 49.  No Democrats voted for the bill and one Republican, Robert Corker, voted against the bill because it would increase the deficit.

While I do not oppose the passage of this bill, Trump’s early morning tweet - “We are one step closer to delivering MASSIVE tax cuts for working families across America” – is not true.  The tax cuts for working families and the middle class is certainly not MASSIVE.  And let’s be perfectly clear.  Self-absorbed Trump truly gets a MASSIVE tax cut in this bill.

A multitude of amendments were added to the original version to win the votes of dissenting Republicans.  A deduction for real estate taxes, up to $10,000, was added, mirroring the House version.  Unfortunately, one of the amendments keeps, but adjusts, the dreaded Alternative Minimum Tax (AMT) for individuals – one of the best components of the original bill.  The House version totally repeals the AMT.  I hope we see the death of the AMT in the final legislation.

I will report on the provisions of the bill that passed, and its differences with the House bill, once analyses have been published.

I look forward to seeing the what the conference committee will come up in the next few weeks.

TTFN

IF YOU ASK ME

The GOP tax plan is not all bad.  Obviously it is not as good at the Republicans suggest, and not as bad as the Democrats insist.  There is good and there is ok.

* Reducing the complexity and inequity of the current Tax Code is good.

* Increasing the Standard Deduction is good. 

* Replacing the personal exemption with a credit is ok, but the taxpayer/non-child credit amount should be higher.

* Limiting the deduction for mortgage interest to $500,000 of a taxpayer’s one primary personal residence and doing away with the deduction for home equity (non-acquisition or improvement related) debt interest is good.

* Limiting the deduction for real estate taxes is good – but the limitation should not be a dollar amount but, like the mortgage interest deduction, allowing a deduction for one primary personal residence only.

* Repealing the dreaded Alternative Minimum Tax (AMT) is very good.

* Increasing the “death tax” exemption while maintaining a full step-up in basis for all inherited property is good.  However, the main “good” is the maintenance of full-step up in basis, and keeping the tax with a lower increase in exemption is ok.

* Reducing the maximum corporate tax rate while at the same time repealing industry-specific loopholes and credits is good – but less of a rate reduction is ok.

And there are certainly things in the plan that are definitely good for some of my clients, whether or not I think they are necessarily good in general.

Two things are certain –

1) The plan is NOT a “massive tax cut” for the middle class.

2) Trump, his family, and the true “wealthy” DO benefit from the plan.  Trump and family benefit “huuuuuuugely”.

What is bad with ANY legislation at ANY time is rushing it through without proper intelligent review, research and discussion merely so the idiot in the White House, and the Republican Party, can claim a legislative victory (Trump really doesn’t give a rodent’s hind quarters what is actually in the bill – he just wants Congress to pass ANY bill so he looks good).

The current proposed legislation is certainly not what I would have written – but I would not be upset if it passed in a less expensive form.

Of course, one way to counter the reduction in money raised under the plan is to cut wasteful spending from the budget.  But that will actually take more intelligent thought and review than writing a proper tax Act – and we all know, from past history, that Congress is apparently incapable of intelligent thought and review.

TTFN

IMPLEMENTING THE POSSIBLE NEW MORTGAGE DEDUCTION RULES

The House passed tax bill – the Tax Cuts and Jobs Act - is NOT as great as the Republicans say it is, and it is NOT as disastrous as the Democrats say it is.

It is a mixed bag – with good, bad, and ugly.  It has some simplification, and also adds unnecessarily to the complication of the Tax Code.

It is most certainly NOT a “massive tax cut for the middle class”.  And arrogant idiot Donald T Rump and his family benefit substantially from its provisions.

Whatever tax legislation is finally signed into law, if one is indeed finally signed into law – it will not deal with the practical implementation of the provisions of the Act.  The idiots in Congress rarely, if ever, take this into consideration when writing tax law.  It will be up to the Internal Revenue Service to establish the rules and regulations for implementation, up to the taxpayer and tax preparer to properly comply, and back to the IRS to verify compliance.

Let us look, for example, at the deduction for mortgage interest.

As I understand it, in the House bill existing mortgage debt is “grandfathered”, keeping the current rules for deduction.  For all new mortgage debt incurred after November 2^nd, or perhaps the date of enactment, the deduction will be limited to interest on principle of up to $500,000 of acquisition debt only for a taxpayer’s one primary personal residence.  Interest on new home equity borrowing will no longer be deductible.  I am assuming that additional borrowing for the “substantial improvement” of the primary personal residence will continue to be classified as acquisition debt.

The Senate’s final version keeps the mortgage interest deduction intact (but it does do away completely with all state and local taxes – income, sales personal property, and real estate).

Currently the Form 1098 (Mortgage Interest Statement) – which the IRS matches to deductions for mortgage interest claimed on Schedule A - reports the total amount of all “mortgage interest received from borrowed”, as well as “points paid on purchase of principal residence”.  It also indicates the outstanding mortgage principle balance at the beginning of the year, for example 1/1/2017, but does not break down the specific amount of acquisition debt or home equity debt. 

The taxpayer is currently responsible for keeping separate track of acquisition and home equity debt – something I truly believe probably 90% of taxpayers do not do, or do not do properly.  And, I expect, a similarly substantial percentage of tax preparers do not keep separate track of debt for their clients.  If the House provision survives the conference committee and makes it into the final law, and no change is made to the current Form 1098, it will be more important than ever for taxpayers to keep separate track of acquisition debt and home equity debt.

A new Form 1098 should be created to separately report –

1. Total mortgage interest received for the year on all “grandfathered” mortgage debt.

2. Year-beginning principle balance of all “grandfathered” mortgage debt.

3. Total mortgage interest received for the year on “new” acquisition debt on the purchase of, and capital improvement to, the mortgagee’s primary personal residence on up to $500,000 in principle.

4. Points paid on the first $500,000 of principle on the purchase of a primary personal residence.

The form would not report any “new” home equity debt interest.

Mortgage lenders should be required to identify the purpose of the borrowing – acquisition debt or home equity debt – via taxpayer certification, and keep separate internal track of the two types of debt.  Perhaps mortgage lenders should create two separate debt instruments and not combine acquisition and home equity debt in the same loan.  Going forward, for simplicity sake, the closing costs on the refinancing of “new” acquisition debt, where the borrower does not take additional money for anything other than capital improvements to the residence, should be included in acquisition debt.  

Obviously, this would create more work for mortgage lenders.  But it would greatly improve compliance and make the job of the IRS, and the tax preparer, much easier.  Mortgage lenders would have a full year from final passage of the Act to change their internal accounting systems.

As an aside – one question I have is whether new refinancing of grandfathered debt would be treated as continued grandfathered debt, and deductible under current rules, or as new mortgage debt, and subject to the new limitations.

And as a further aside - I totally support the new treatment of the deduction of mortgage interest as it exists in the recently passed House version of the Act.  I would actually go further and limit “grandfathered” debt to mortgages only on a taxpayer’s one primary personal residence – I would no longer allow any itemized deduction for a second or vacation home. 

There will certainly be implementation issues with other provisions of any final act that will need to be, hopefully, intelligently dealt with.

So, what do you think?

TTFN 

THE HOUSE DOES IT

Yesterday the House passed the “Tax Cuts and Jobs Act” (H.R. 1) by a vote of 227-205 along party lines.  Not a single Democrat voted for the Act, and 13 Republicans from states with high taxes voted against it – no surprise there. 

While it very obviously is NOT a “massive tax cut for the middle class” as promised by arrogant arsehole Donald T Rump and the Republicans, and serial liar Trump and his family benefit “huuuuugely” from its provisions, it is not all bad.  As I have said elsewhere, like TRA ’86 it is a mixed bag – there is some simplification, yet there is also more ridiculous complication.  I wrote about the House version in several previous posts here at TWTP - click here, here, here, and here.

The Senate will vote on its version after Thanksgiving, and the prospect for passage is actually up in the air.  If the Senate does pass its Act, a conference committee will have to work out the differences.

I will not discuss this Act in detail any further until it is actually signed into law by the idiot in the White House, if that actually does happen.

What I will talk about at this time is what is actually very, very good in the House bill, as I understand what it includes - items which I really, really, really hope will remain in any final bill that is signed into law.

1) It maintains the step-up in basis for inherited assets even after the total repeal of the federal Estate Tax.

(2) It repeals the dreaded Alternative Minimum Tax.

(3) It provides an annual inflation adjustment for the Standard Mileage Allowance amount for charitable driving.

As for everything else, while I support some items and oppose others, I will not be devastated if any of the other items I support do not make it to the final cut.

TTFN

THE REPUBLICAN TAX PROPOSALS – EVEN MORE COMMENTS

Over at DON’T MESS WITH TAXES earlier this week, Kay Bell suggested “Tax reform could cost charities $13 billion a year”.

I don’t agree that reducing the number of itemizers will so substantially reduce charitable giving.  The post indicates that currently about 1/3 of taxpayers itemize.  But certainly more than 1/3 of taxpayers contribute to charity.  I do not itemize and I contribute to charity.  If I were able to itemize I would not give any more than I normally would just to get a tax deduction.

Taxes are pennies on a dollar.  A $100 charitable contribution may save $15 or $25 or more in federal taxes if you currently itemize.  But, as with any other deductible item, the purpose for spending the money for the item is not just to get a tax deduction – or it SHOULD not be.  That would be stupid.  There is no sense or logic in spending $100 to save $25 – you are still “out of pocket” $75. 

Being able to deduct charitable contributions is just an added benefit to the gift – an additional “thank you” – and not the primary motivating factor.  People who have always given to church and charity are not going to automatically stop just because they can no longer itemize and claim a tax deduction for their gift.

The ability to itemize can affect the timing of the contribution – sooner instead of later – when it comes to year-end tax planning.  For example, many current itemizers who may not be able to itemize in the future under the GOP proposal will “accelerate” their contribution and give money that they were going to give to charity in 2018 in November and December of 2017.

If a $100 donation, which previously only cost $75, will actually now cost $100, perhaps in some cases a person may only give $75 instead.  But I do not think that will happen on a grand scale.

Taxpayers often don’t know if they will be able to itemize until they actually prepare their return.  In 45 years no client has ever called or emailed me before giving to charity to ask if he will be able to itemize, waiting for my answer before making the contribution.

TTFN

THE REPUBLICAN TAX PROPOSAL – THE DISCUSSION CONTINUES

 Like the historic Tax Reform Act of 1986, the current proposed Tax Cuts and Jobs Act is a mixed bag.

There is simplification.  Less rates, less deductions and credits, no more Pease phase-out of the remaining itemized deductions, and the repeal of the dreaded Alternative Minimum Tax.

But there is new complexity.  The ridiculous special tax treatment of “pass-through” business income, apparently including sole proprietorships reported on Schedule C, is truly a convoluted mucking fess.  It looks like the computation of pass-through business income will be a nightmare for tax professionals – fortunately, based on my clients, not for me, but definitely for my colleagues.

If we want parity for the tax treatment of pass-through entities here is what I think should happen.

Taxation of pass-through income from Schedule C sole proprietorships should remain the same as current law – taxed as ordinary income subject to SE tax. 

Pass through business income of the “general partners” of a partnership, the equivalent of Schedule C sole proprietors, should also not change – it is taxed as ordinary income subject to SE tax.  Pass through business income of the “limited partners” of a partnership is basically the equivalent of corporate dividends, and should be taxed as such.

Pass through business income of a shareholder in a sub-S corporation is also basically the equivalent of corporate dividends, and should be taxed as such.

The Act maintains the current special tax rates for qualified dividends and long-term capital gains (it also maintains the NIIT and .9% Medicare “Obamacare” surtaxes).  But it appears it also maintains the tax brackets for these rates the same as under current law, and does not just apply the rates directly to the new tax rate brackets – so there will actually be two sets of tax rate brackets.

There are some weird items in the proposal.  Taxpayers would be able to contribute to a 529 Education Saving Plan on behalf of an unborn child - described as “a member of the species homo sapiens, at any stage of development, who is carried in the womb”.  And churches would be allowed to make political statements, and pastors endorse specific political candidates from the pulpit, without losing tax-exempt status.  Just one more example of the Republican Party pitiful pandering, erroneously and certainly contrary to traditional conservative philosophy, to the “religious right”.

In my opinion, from a tax policy point of view, some of what is wrong with the Act, based on my Principles of Tax Reform (click here) is –

It continues to use the Tax Code to distribute federal social welfare and other tax benefits – the Earned Income Tax Credit and the education benefits for example.

It continues to provide refundable credits, which are a magnet for tax fraud.

It continues to phase-out tax deductions and credits based on an AGI income threshold.

I expect the above will NEVER be changed, and the Tax Code will ALWAYS be used, erroneously and inappropriately, to distribute government benefits and provide refundable credits and a “back-door” progressive tax rate increase without the honesty of actually increasing tax rates.  But I can dream, can’t I.

Your thoughts?

TTFN

  

  

MORE DETAILS AND THOUGHTS ON THE PROPOSED REPUBLICAN TAX ACT

Here are more details of and commentary on the "Tax Cuts and Jobs Act" as finally revealed – the “fleshing out” of the cocktail napkin scribblings.

As I have said in the past, my interest in and comments on the Act are not from an economic point of view – who pays more and who saves more.  With any tax reform legislation, I look at it in terms of tax policy and of simplification and fairness.

Although I am a tax professional, and in theory my business benefits from continued complication, I strongly believe that tax simplification, even in the extreme, would not result in a loss of clients or of income.  It would only greatly reduce the agita, aggravation and anxiety related to 1040 preparation.

A very important “disclaimer” that I should have included in Friday’s post on the details of the Act.  Everything I posted Friday, and below, is “proposed” tax legislation.  None of it is actual tax law.  Chances are very good that any final bill signed into law will be different, perhaps very different, then what I have identified and discussed then and here.  And it is also possible that no tax Act will actually be passed. 

* The limited deductions for acquisition debt mortgage interest (on new home purchases) would apply only to your one primary personal residence – the home you live in.  I support the reduction in the acquisition debt threshold, the repeal of the deduction for home equity interest, and limiting the deduction for mortgage interest to one primary residence.

* The limited deduction for real estate taxes, up to a maximum of $10,000, appears to be available for taxes paid on the home you live in and vacation homes.  The $10,000 limitation applies to all homes combined.  I oppose the dollar limitation on the property tax deduction, but I would want the deduction to be limited to your one primary personal residence – the home you live in – like the deduction for acquisition debt interest.

* My Friday post stated that alimony paid would no longer be deductible.  This means that alimony received would no longer be included in taxable income.  I agree that this certainly simplifies the issue – but I don’t know if I support this.  I think the current system is actually “more fair”.  I would perhaps limit the deduction to actual payment of “spousal support” and no longer allow an alimony deduction for expenses paid to a third-party on behalf of the former spouse, such as health insurance.

* Currently a business can deduct 50% of “entertainment” expenses if it “establishes that the item was directly related to the active conduct of the taxpayer’s trade or business”.  An expense is considered directly related if “it is associated with a substantial and bona fide business discussion”.

But under the Act “no deduction would be allowed for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes”.

Also – “In addition, no deduction would be allowed for transportation fringe benefits, benefits in the form of on-premises gyms and other athletic facilities, or for amenities provided to an employee that are primarily personal in nature and that involve property or services not directly related to the employer’s trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee).”

I have mixed feelings about this change.  I do realize there is much abuse of the entertainment deduction, even at the 50% level, especially by closely-held businesses.  But in many cases business entertaining is as important, and legitimate, an expense as advertising. 

I have always had concerns about the 50% limitation on business meals.  I realize that the employee or business owner has to eat anyway – but there are often more than two clients at a business meal, and even though the employee/owner has to eat anyway, not necessarily at the same level of out of pocket expense.

In general, I don’t support the concept of the government determining what is an “appropriate” business expense – other than to disallow a deduction for expenses that are illegal or discriminatory.  It is one thing if company gyms are available to all employees and another if use is limited to corporate officers and high-level executives.

* While the Act keeps the Child and Dependent Care Tax Credit, the employer-sponsored Flexible Spending Account for child and dependent care, with up to $5,000 of employee contributions treated as “pre-tax”, is repealed.  This often provided a better tax benefit than the Form 1040 credit.    Also gone is the tax-exempt treatment of the first $5,250 of “Employer-Provided Educational Assistance”.  I am not sure if I support either of these changes – although I can live with them. 

* Currently interest on municipal “Private Activity Bonds” are exempt from taxation under the “regular” income tax, but are taxable under the dreaded Alternative Minimum Tax AMT).  The Act does away with the AMT, but interest on all “private activity” municipal bonds issued after 2017 will be fully taxable as ordinary income, the same as the interest on corporate and savings bonds. 

* I am curious to see how the final federal tax law changes will affect state tax returns.  Most state returns, except for at least NJ and PA that I know of, begin with the federal AGI and allow most federal itemized deductions – except for state and local income taxes.  And most state tax returns also allow for the same number of personal exemptions that are claimed on the federal return.  State returns do not always follow the federal Standard Deduction allowance – several have their own lower state Standard Deduction.  If individual state tax laws do not change, and the federal AGI and Schedule A as changed is used, state income taxes, no longer deductible on the federal return, will certainly increase.

In terms of year-end tax planning – the traditional strategies most certainly apply.  Accelerate deductions to be claimed in 2017 - especially deductible medical, job-related and tax preparation expenses and state income and local income or sales taxes.  And postpone the receipt of taxable income until 2018.

TTFN

IT'S HERE - THE DETAILS OF THE "FRAMEWORK"!

I haven’t done deep research on the Tax Cuts and Jobs Act – but based on what I have read here is how it would affect individual taxpayers.

There would be 4 tax rates – 12%, 25%, 35%, and 39.6% - with increased brackets.

Adjustments to Income:

The educator expenses up to $250 per taxpayer, moving expenses, alimony, student loan interest, tuition and fees, and domestic production activities costs would no longer be deductible.

Schedule A:

Medical Expenses – No longer deductible.

Taxes – Up to $10,000 (hey, like the NJ-1040) of real estate (aka property) taxes only.  No deduction for state and local income or sales tax or, presumably, personal property tax or foreign income tax.

Interest – Rules remain unchanged for existing mortgage debt.  For debt incurred after November 2, 2017, only interest on acquisition debt of up to $500,000 in principal is deductible.  Interest on new home equity debt incurred after November 2, 2017 is no longer deductible.

Charity – Rules remain unchanged for the most part (some minor changes appear to be made to more obscure charitable deduction rules).  The standard mileage allowance rate for mileage in the course of providing volunteer services to a qualifying organization would be indexed for inflation.

Casualty and Theft Losses – No longer deductible.

Job Expenses and Certain Miscellaneous Deductions – Unreimbursed employee business expenses and tax preparation fees and costs no longer deductible.  All other miscellaneous deductions subject to the 2% of AGI exclusion are also probably no longer deductible.

Gambling Losses – Losses would still be deductible to the extent of winnings.  It appears that non-loss deduction for “professional gamblers” no longer allowed. 

There would be no more “Pease” reduction of itemized deductions based on AGI.

The standard deduction would be $12,000 for Single filers, $18,000 for Head of Household (so it appears the Head of Household filing status remains), and $24,000 for Married filing jointly.  There would be no additional standard deduction amount for blind or age 65 or older. 

There is no personal exemption.  The Child Tax Credit would be increased from $1,000 to $1,600 per dependent child, with the first $1,000 being refundable, and the phase-out threshold would be increased to $115,000 for single filers and $230,000 for joint filers.  A non-refundable $300 credit would be allowed for the taxpayer, his spouse, and all “non-child” dependents.  The same phase-out threshold would apply to this new $300 credit. 

The Lifetime Learning Credit is gone.  The American Opportunity Credit remains as it is under current law, but would be available for a 5^th year of post-secondary education at half the rate that applied for the first 4 years, with up to $500 being refundable.

The exclusion of up to $250,000 ($500,000 on joint return) of gain on the sale of a personal residence remains, but the “2 out of 5” year rule is changed to “5 out of 8”.  You must own and live in a personal residence for at least 5 of the 8 years prior to sale to qualify for the exclusion.

The determination of the tax on “pass-through” business income, including the income of “sole-proprietorships” reported on Schedule C, becomes a convoluted “mucking fess”.  However, a “personal service” business – “businesses involving the performance of services in the fields of law, accounting, consulting, engineering, financial services, or performing arts” – would not necessarily benefit from the lower 25% maximum tax rate.   

The dreaded Alternative Minimum Tax is repealed (hurray!).

It appears that there is no change to the special lower tax rates for qualified dividends and long term capital gains - other than new bracket thresholds for the specific rates.  And the 3.8% Obamacare NIIT apparently remains.

The estate tax exemption is increased to $10 Million, indexed annually for inflation.  The tax is totally repealed after 6 years.  However, it appears a beneficiary’s stepped-up basis in estate property will remain even after the repeal.

It looks like just about everything, except the mortgage deduction for new debt after November 2^nd, will take affect beginning with tax year 2018.  So there should be no changes for the 2017 Form 1040.

Speaking of the new mortgage interest rules, limiting the deduction for new debt to acquisition debt – unless 1098 reporting is substantially enhanced this makes the need for taxpayers to keep separate track of acquisition and home equity debt even more important.

There is some good news in the details revealed.  I am pleased that -

* the standard mileage rate for charitable travel is finally indexed for inflation,

* the lower maximum pass-through tax rate rules are not as ridiculous and inequitable as they could have been, although they create much new complexity and I still think the concept is stupid, and

* the step-up in basis for inherited assets remains intact even after total repeal of the Estate tax.

Unfortunately, the Earned Income Credit, including refundability, remains intact.

I am disappointed that the Act does not do away with the Obamacare "individual mandate" and the "shared responsibility" penalty for taxpayers without adequate coverage.

And, in my opinion, the total repeal of the deduction for state and local income or sales tax and limitation of the property tax deduction amount, and the total repeal of the deduction for employee business expenses creates inequities in the tax system.  And the repeal of the casualty loss deduction means that every time there is an excessive natural disaster, like Katrina, Sandy, and the recent hurricanes, Congress will have to pass temporary tax benefits for victims.

I expect more information will be made available in the days to come.  And then the debate will begin and we will see if a law can be passed – despite the ineptitude of arrogant idiot Donald T Rump.

TTFN