SOME NEWS AND A REMINDER

(1) The Social Security Administration announced on Monday that it has revised the 2018 taxable wage base –

“The new amount for 2018, based on updated wage data reported to Social Security, is $128,400.”

In a press release the SSA explained -

“Based on the wage data Social Security had at the time of the October 13, 2017, announcement, the maximum amount of earnings subject to the Social Security tax (taxable maximum) was to increase to $128,700 in 2018, from $127,200 in 2017.”

And -

“This lower taxable maximum amount is due to corrected W2s provided to Social Security in late October 2017 by a national payroll service provider. Approximately 500,000 corrections for W2s from 2016 resulted in changes for three items based on the national average wage: the 2018 taxable maximum, primary insurance amount bend points--figures used in the computation of Social Security benefits--and family maximum bend points. No other items based on national average wages were affected.

The change to the taxable maximum does not take effect until January 2018, and the updated bend points in the benefit computation only apply to people who initially become eligible for Social Security benefits in calendar year 2018. This does not affect current beneficiaries.”

As a result of this revision, the maximum withholding for Social Security tax in 2018 is now $7,960.80.  And for 2018 the self-employment tax imposed on self-employed people is 12.4% Social Security tax on the first $128,400 of self-employment income, for a maximum of $15,921.60, plus 2.9% Medicare tax on the all self-employment income. 

(2) I recently received the following email reminder from the New Jersey Division of Taxation.

“Starting January 1, 2018, the Sales and Use Tax rate will decrease from 6.875 to 6.625%.  

Please prepare to update your records accordingly. The new tax rates will be:

* Atlantic City Luxury Tax-

12.625% (9% Atlantic City Luxury Tax and 3.625% New Jersey Sales and Use Tax for sales subject to both taxes ‒ other than alcoholic beverages by the drink);

9.625% (3% Atlantic City Luxury Tax and 6.625% New Jersey Sales and Use Tax for alcoholic beverages that are sold by the drink in Atlantic City);

* Boat and Other Vessels Sales Tax ‒ 3.3125% (50% reduced rate);

* Cape May County Tourism Tax ‒ 8.625% (6.625% New Jersey Sales and Use Tax and 2% Tourism Tax for Wildwood, Wildwood Crest, and North Wildwood). This rate is in addition to the 1.85% Tourism Assessment and the 3.15% State Occupancy Fee on hotel occupancies;

* New Jersey Sales and Use Tax ‒ 6.625%;

* Salem County Sales Tax ‒ 3.3125% (50% reduced rate);

* Urban Enterprise Zone Sales Tax ‒ 3.3125% (50% reduced rate).

If you have any questions:

* Visit here for more information about New Jersey Sales and Use Tax or

* Call the Division of Taxation's Customer Service Center at 609-292-6400. We're available Monday, 8:30 a.m. to 5:30 p.m. and Tuesday through Friday, 8:30 a.m. to 4:30 p.m., except State holidays.”

TTFN

THE PATH ACT OF 2015 AND TAX PLANNING FOR 2016

Now that the “tax extenders” have been extended, many of them permanently, via the PATH ACT OF 2015, here are some of these benefits that you should keep in mind from a tax planning point of view during tax year 2016.

STATE AND LOCAL SALES TAX (PERMANENT) -

You can elect to deduct state and local sales tax paid instead of deducting state and local income tax paid. If you deduct state and local income tax on Schedule A you cannot also deduct state and local sales tax, and vice versa. 

For this purpose state and local income tax includes the deductible unemployment (SUI), disability (SDI), and/or family leave (FLI) contributions withheld in certain states.  If you elect to deduct sales tax you cannot also deduct state unemployment, disability, and/or family leave taxes.

You have two options for claiming a sales tax deduction – the actual amount paid for the year, per receipts, or the amount taken from the IRS-generated Optional State Sales Tax Tables, with an additional amount allowed if you also pay local sales tax, plus the tax paid on the purchase of “big-ticket” items such as a car, motorcycle, truck, van, recreational vehicle, sport utility vehicle, off-road vehicle, boat, airplane, motor home, home, and home building materials, and any sales tax paid on the lease of a motor vehicle.

The amount you can deduct if you use the IRS tables is based on your “total available income”, your state of residence, and the number of exemptions you claim. Your “total available income” includes your Adjusted Gross Income plus any nontaxable receipts, such as –

·      tax-exempt interest,

·      Veteran’s benefits,

·      nontaxable combat pay,

·      Workers’ Compensation benefits,

·      the non-taxable portion of Social Security and Railroad benefits,

·      the non-taxable portion of IRA, pension or annuity distributions (not amounts that are “rolled-over”), and

·      public assistance payments.

If a couple files separately, and both spouses elect to deduct state and local sales tax, and one spouse elects to use the sales tax tables instead of actual sales tax paid, the other spouse must also use the tables to determine the state and local sales tax deduction on his/her separate Schedule A.

You should keep track of all of the sales tax you pay during the year by saving, in a small box or a manila envelope, all purchase receipts that indicate an amount of sales tax paid.  In January of next year add up all of the sales tax amounts on these receipts and see if the total exceeds both the amount of state income tax, if any, that you can deduct and the sales tax deduction allowed from the IRS-generated Optional State Sales Tax Tables.

You may want to do a preliminary comparison as part of your year-end tax planning in November.  If you have enough in sales tax to provide a better tax benefit, or are “close to the edge”, and you were planning to purchase a new car or other big item(s) early in the New Year, considering making the purchase at the end of December to get the increased tax deduction for 2016.

When doing your comparisons keep in mind if you deduct the total amount of state income tax withheld on Schedule A for 2016 you may have to claim any refund received as taxable income on your 2017 tax return.

QUALIFIED CHARITABLE DISTRIBUTION (PERMANENT) -

A Qualified Charitable Distribution (QCD) allows IRA owners age 70½ and older to directly transfer up to $100,000 from an IRA account to a qualified charity, tax-free, as part (or all) of their Required Minimum Distribution (RMD) for the year.

Any portion of an RMD that represents a QCD is not included in gross taxable income reported on Line 15(b) “Taxable amount” of “IRA distributions”) on Page 1 of Form 1040.  If your total Required Minimum Distribution from your IRA investments for the year is $50,000, and you have made a QCD of $40,000, you only report $10,000 as a taxable distribution.  If the entire $50,000 was used as a QCD you have “0” taxable income to report.

By reducing the amount of the RMD that must be included in gross income you also reduce your Adjusted Gross Income (AGI), and, by doing so, you can also potentially reduce the taxable portion of Social Security or Railroad Retirement benefits and increase the multitude of deductions and credits that are reduced or phased out as AGI rises. 

You are not allowed to claim a charitable deduction for the amount of the QCD on Schedule A – the “deduction” has already been claimed by reducing the taxable portion of your RMD. 

RESIDENTIAL ENERGY TAX CREDIT (FOR 2016 ONLY) -

The credit allowed is 10% of the cost of qualifying energy-efficient purchases and improvements, up to a lifetime maximum of $500.  Some items are limited to a credit from $50 to $300.  The qualifying purchase or improvement must be for an existing home that is your principal residence.

If you claimed at least $500 in energy tax credits on your 2006 through 2015 returns, you are not eligible for a credit for 2016. If you claimed $300 in energy credits over the years, the most you can claim in 2016 is $200.

The credit is available for –

• Biomass Stoves

• Heating, Ventilating, Air Conditioning (Advanced Main Air Circulating Fan, Air Source Heat Pumps, Central Air Conditioning, Gas, Propane, or Oil Hot Water Boiler, and Natural Gas, Propane or Oil Furnace)

• Insulation

• Roofs (Metal and Asphalt)

• Water Heaters (Gas, Propane or Oil Water Heater, and Electric Heat Pump Water Heater)

 

• Windows and Doors

The individual limitations on the credit for specific items are -

·   $50 for an advanced main air circulating fan,

·   $150 for a qualified natural gas, propane, or oil furnace or hot water boiler, 

·   $300 for an item of energy efficient building property, and

·   $200 lifetime limit for windows.

Not every new window, door, boiler, heater, or furnace will qualify. There are very specific "energy efficiency" requirements for each of the qualifying items. You can go to the Energy Star website to find out what the specific qualifications are for individual items.  

When giving your tax pro your “stuff” next February or March do not just include a copy of the bill for one of the listed items, or a note that you spent $800 for a new hot water heater, and expect him/her to waste his/her valuable time attempting to determine if the purchase qualifies for the credit. Do the homework and determine if your purchase qualifies before contacting your tax pro.  When you purchase any of the listed items ask the person selling it for a “Manufacturer’s Certification Statement” - a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit.

My standard final word of advice – before acting on anything you have read here contact your tax professional.

TTFN

THE ANNUAL NJ-NATP FAMOUS STATE TAX SEMINAR

This past Saturday I attended the NJ chapter of NATP’s annual “Famous State Tax Seminar” at the Woodbridge Hilton in Iselin.  I try to get to this seminar every year, and have only missed a handful in it’s, I expect, 20+ year history.

The day’s schedule is limited to state tax updates – New Jersey, New York, and sometimes Pennsylvania.  As I was sitting there on Saturday it occurred to me that one of the reasons it is so consistently good is that we are not forced to sit through yet another 2 hours of redundant and unnecessary Ethics preaching.  

As has been a custom, the first presentation of the morning was the “keynote” address by the Director of the NJ Division of Taxation.  The current Director is Michael Bryan.  This year’s all-too-brief “keynote” presentation was a total waste of time.

While I do like the fact that the Director is on the agenda, I wish he would say something of value and not just quote uninteresting economic statistics and merely touch on some items that are presented more thoroughly and effectively later in the day by one of his DOT employees.  I want him to address real issues, or take serious questions from the floor on systemic and other problems we tax pros face in dealing with the often incompetent DOT.

The only NJDOT Director that has ever given a presentation of value has been Bobby Thompson years ago (I believe he left office under a cloud concerning, again I believe, having received too many “gifts” from DOT vendors).  The head of the Division of Revenue also gave a good and insightful presentation several years ago, but has never returned.

Here’s a thought - a “Q+A” instead of a formal presentation.  Expand the Director’s allotted time.  Give those who sign up for the seminar the opportunity to email the Education Committee a question they would like the Director to answer or an issue they would like him to address.  The Committee would review the submissions and select what to put to the Director.  Members of the audience would be allowed to comment or ask for clarification on the Director’s responses.

The rest of the morning was taken up by an excellent presentation on the NJ Estate and Inheritance Tax by the best actual “presenter” of the day – attorney Michael Feinberg, who has appeared on the “bill” before (his presentation style is perfect, and he was certainly intimately knowledgeable on his topic; while I do not, and do not want to, prepare estate or inheritance returns, I found the talk interesting as a potential beneficiary and Executor, and close friend of potential beneficiaries and Executors), and a workmanlike presentation on NJ Sales and Use Tax issues and updates by another attorney (and returning speaker), Susan Feeney, who was also very knowledgeable on her topic.

After a buffet lunch, this time in a private room (it is usually in one of the hotel’s restaurants), we returned for the real meat of the day – New Jersey and New York state tax updates.  

Alexis DeRosa from the NJDOT is a fine successor to the wonderful “Jim and Jake Show” NJ updates of the past, which were always the highlight of the day.  And witty EA Katherine Keane has become a fixture of the event providing New York State income tax updates.

As a point of information, Michael Feinberg was the only speaker who definitively addressed the issue of same-sex marriage and NJ taxes.

Here are some of the items of interest from the day’s presentations –

* The NJDOT will begin to actively enforce the tax preparer e-file mandate in the future.  Since I do not use flawed and expensive tax preparation software, and never will, I cannot e-file NJ returns the traditional way.  I use NJWebFile whenever I can, and the client permits, but it has too many restrictions, and I am forced to file a paper return.

* To be able to take advantage of the “portability” of the federal estate tax exemption available to married couples the estate of the first spouse MUST file a federal estate tax return (Form 706) regardless of the amount of the gross or taxable estate.  There is no “portability” for the NJ estate tax.

* There is NEVER an income tax consequence for the recipient of a gift.

* The however legitimate attempts by NJDOT to verify NJ Earned Income Tax Credit eligibility often make the NJ-EITC more of a PITA for tax preparers than the federal due diligence requirements.  All the more reason why the EITC does not belong on any tax return.

Once again kudos to NJ-NATP for a great seminar.

TTFN

WHAT'S THE USE?

Just about every state resident tax return now has a line for the taxpayer to enter “Use Tax on Out of State Purchases”.  It is line 44 on the NJ-1040 and line 59 on New York’s IT-201.  Many states require that you make an entry on this line – even if it is 0.00.

The instructions for the 2011 NJ-1040 tell us –

“If you were a New Jersey resident and you purchased items or services that were subject to New Jersey sales tax, you are liable for use tax at the rate of 7% of the purchase price {the normal NJ sales tax rate – rdf} if sales tax has not been paid.  If sales tax has been collected out of State, use tax is only due if the tax was paid at a rate less than 7%, based on the difference.”

The instructions provide the following examples –

“You purchased a computer for $1,500 from a seller located outside of New Jersey and no sales tax was collected.  Your use tax liability to New Jersey on this item is $105 ($1,500  .07 = $105).

♦ On a trip to Maine you purchased an antique desk for $4,000 and paid Maine sales tax at the rate of 5%. The difference, $80 (2% of the purchase price), is due to New Jersey as use tax.”

If you do not know the exact amount of use tax that you would owe some states will provide an “Estimated Use Tax Chart”.  For example, if your NJ Gross Income is between $75,001 and $100,000 the state suggests you claim $53 in use tax.

I expect that at least 98% of all US taxpayers do not claim any use tax on their state return.  And a great majority of the 2% or less who do are employees of a state tax agency.  In my 40 years in the business I have never had a client voluntarily pay state use tax on their state resident income tax return.

There are those who purposefully shop for big ticket items out of state and have the items shipped to their nonresident address in order to avoid paying state sales tax at the point of purchase.  When this is done the purchaser is liable for use tax on the purchase in his home state.

The at the time Director of the NJ Division of Taxation Robert Thompson told the NJ-NATP annual Famous State Tax Seminar a story several years ago where an attempt to avoid paying sales tax backfired.

The NJ Division of Taxation has had success in sales and use tax enforcement.  In one instance the Division got a hold of the names and addresses of NJ residents who had purchased jewelry from a store just over the border in NY and had the items shipped to their NJ address, and therefore did not pay NYS sales tax.

The NJDOT send a letter, and a use tax bill, to each name on the list.  One of these mailings was opened by the wife of a NJ doctor who thought there was an error on the billing.  The wife called the NJ Division of Taxation and told them –

“You have made a mistake on your billing.  My husband only purchased one diamond bracelet.”

The husband, who apparently purchased matching diamond bracelets for his wife and his mistress, should have paid the sales tax upfront!

If you were a totally honest taxpayer, and in 2011 you did pay use tax on out of state purchases you made, and you choose to deduct state and local sales tax instead of state and local income tax on your 2011 Schedule A, and you elect to deduct the actual tax paid instead of using the optional tables you can also deduct the use tax you paid.  According to the instructions for Schedule A (highlight is mine) –

“Generally, you can deduct the actual state and local general sales taxes (including compensating use taxes) you paid in 2011”.  

TTFN

PAY THE SALES TAX AND AVOID THE DIVORCE LAWYER!

In my reprint of a September 2001 post on the benefits of a national sales tax I mentioned that – “States like New Jersey have had much more success raising revenue from sales tax audits than from audits of income tax returns.”

A while back then Director of the NJ Division of Taxation Robert Thompson – who left office after being charged with “making discretionary decisions while under undisclosed conflicts of interest caused by their receipt of meals, entertainment, golf outings and other gifts” from OSI, the outside collection agency hired by the NJDOT to collect outstanding NJ taxes – told the NJ chapter of the National Association of Tax Professionals about NJ’s special sales tax audit initiative.

The program would target NJ businesses where pretty much 100% of gross receipts are subject to sales tax – like pizza parlors, liquor stores and taverns. NJDOT would get purchase information from vendors who supplied the business selected for audit with “cost of goods sold” items (i.e. wholesale pizza dough and liquor purchases), get a price list or menu from the business being audited, verify inventory numbers, and, using industry standards for spoilage and theft, “back into” what the business should have reported in gross sales subject to sales tax. If this was more than what was actually reported on quarterly sales tax reports the business would receive a bill.

It was not the goal of the program to put the pizza parlors, liquor stores or taverns being audited out of business. The sole purpose was to collect more tax. No criminal or other action was brought against the business by the State and the bill was not overloaded with penalties.

This program was very successful.

Bob Thompson told of the audit of one pizza parlor, which happened to be located around the corner from the NJDOT headquarters in Trenton. The Division asked the parlor to submit a menu, which was reviewed by the auditors. One auditor then visited the parlor and asked the owner, “How come if the menu you sent us says you charge $2.00 for a slice of pizza, when I come in here for lunch you charge me $2.75?” Apparently the owner was not too bright!

My favorite story concerns the state's attempt to collect “use tax” on out of state purchases.

A sales tax is a “consumption” tax assessed and paid at the “point of purchase”. The State of NJ current charges a 7% sales tax on the purchase of qualifying items made within the state. You go to a local McDonalds in Jersey City and buy a Big Mac and you pay NJ state sales tax on the purchase. The sale takes place in NJ and you “take possession” of the Big Mac in NJ – so it is subject to NJ sales tax.

If a New Jersey resident purchases a taxable item in New York and will walk out of the store with that item in hand he/she will pay New York state sales tax on the item, even though the item will ultimately be used in New Jersey, and will not owe any tax to NJ.

But if a NJ resident purchases an item from a New York vendor and has the item shipped to a New Jersey address he/she does not pay New York state sales tax at the point of purchase. That person then must pay a use tax on the purchase to the State of New Jersey.

NJ use tax is paid by any individual who “stores, uses, or consumes” within the borders of the state of New Jersey tangible personal property subject to NJ sales tax that was purchased from an out-of-state seller and no local sales tax was paid at the “point of purchase” to the out-of-state seller. Got that?

So if you order a bracelet from a New York jeweler and have it shipped to your New Jersey address you would not pay sales tax to New York, but you would be liable for New Jersey use tax on the purchase.

Individuals pay any NJ use tax liability as part of the filing of the NJ-1040 state income tax return. Most state tax returns will have a line where the taxpayer can enter an amount for use tax due. Many of these states, NJ included, require that if a resident is not declaring a use tax liability he/she must enter “0” on the appropriate line – so that the taxpayer is “going on record” that he/she does not owe any use tax.

And that is what the story is about.

The NJ Division of Taxation got a hold of the records of a jewelry store located in New York (possibly as a result of a NYS audit of the store – I don’t remember the actual details) and made a list of all purchases where the items were shipped to a New Jersey address and no NY state sales tax was paid. The Division then sent a bill for the appropriate amount of use tax to the registered NJ residences of all those on the list.

One of these bills arrived at the home of a married doctor and was opened by the wife. After she reviewed the bill she immediately called the NJ Division of Taxation.

“I have just received a bill for use tax from the Division of Taxation and I think you have made an error,” she said.

“What is the error,” the DOT employee asked.

“My husband only gave me one diamond bracelet!”

So the moral of the story – if you are going to give your wife and your mistress the same expensive gift don’t buy both at the same time, and be sure to pay state sales tax on the gift for your mistress!

TTFN

SO WHAT DO YOU THINK – A NATIONAL SALES TAX?

While searching the “archives” of THE WANDERING TAX PRO for something else I came across my first post on the subject of the “Fair Tax” – a national sales tax.

While I am certainly not at all sold on the idea, since this is a time when alternatives to the current federal income tax system are being discussed and considered, and there has been talk of a VAT (value added tax), which I do not at all support, the idea of a national sales tax should also be seriously looked at.

I have decided to “reprint” this post from the true “infancy” of TWTP. It was originally posted on Tuesday, September 4, 2001 (I started TWTP in July of 2001). Here is the post in its entirety –

“I labored all through Labor Day, working on various amended returns and assorted “stuff”. I did, however, manage to take time out for dinner with family at the Lincoln Inn in the Heights section of Jersey City (best Chicken Cordon Bleu around).

The older I get, the more I agree with the old adage – ‘Children should be neither seen or nor heard’. Especially in restaurants!

SOAPBOX

This summer, Representative John Linder, along with 7 co-sponsors, introduced THE FAIR TAX ACT OF 2001, which has been sent to the House Ways and Means Committee to review.

The bill attempts to ‘promote freedom, fairness, and economic opportunity’ by abolishing the Internal Revenue Service and repealing the federal income, payroll (Social Security and Medicare), estate and gift taxes. The funds generated by these taxes would be replaced by a National Sales Tax of 23%.

While this particular bill, as written, is not the answer (it calls for a complicated registration of all households and a monthly sales tax rebate program), and certainly will not be passed by Congress, it does bring up a viable alternative to the current tax system – a national sales tax.

1) A national sales tax would be relatively easy to administer. Almost all of the 50 states already have a state sales tax, with all the appropriate collection and auditing functions in place. The national sales tax could be incorporated into the collection and compliance process of the various state sales taxes, with the states receiving a ‘commission’ from the federal government.

2) A national sales tax (with perhaps exemptions for food and clothing purchases) would eliminate the problem of the ‘underground economy’, which escapes taxation under the present system. Everyone, regardless of the source of their income, would pay sales tax at the point of purchase.

3) A national sales tax would encourage saving and investing. As the tax is assessed on retail purchases only, income from investing activities would not be subject to tax.

4) If under the national sales tax system corporate and business income taxes are abolished, along with the need for expense compliance costs, the savings would {I was naive – should have said ‘could’ - rdf} be passed along to consumers in the form of reduced prices and to stockholders in the form of increased dividends.

5) States like New Jersey have had much more success raising revenue from sales tax audits than from audits of income tax returns.”

I still agree with the 5 points made above.

,

I also still believe that children should be neither seen nor heard - especially in restaurants!
,
So what do you think?

TTFN