THIS JUST IN – IRS COLA AND INFLATION ADJUSTEDMENTS FOR 2018

As it does every year at this time, the Internal Revenue Service has announced the new inflation and COLA adjustments for calendar year 2018.

 

I am in the process of preparing my annual “What’s New in Taxes for 2018” report.  I will let you know when it is available.  But I will identify some of the basic changes for you here.

 

For calendar year 2018 tax returns -

 

The Personal Exemption is $4,150 (up from $4,050).

 

The Standard Deduction Amounts are:

 

Single and Married Filing Separate= $6,500 (up from $6,350)

Head of Household = $9,550 (up from $9,350)

Married Filing Joint and Qualified Widow(er) = $13,000 (up from $12,700)

 

The Standard Deduction for a dependent remains the greater of (1) $1,050, or (2) the sum of $350 and the individual's earned income.

 

The additional Standard Deduction amount for the age 65 or older or blind is $1,300 (up from $1,250) for married individuals and $1,600 (up from $1,550) for Single and Head of Household.

 

The maximum IRA contribution and “catch-up” remains at $5,500 and $1,000. 

 

The maximum employee contribution to a 401(k), 403(b), 457 and federal Thrift Savings Plan is $18,500 (up from $18,000).  The “catch-up” contribution remains at $6,000.

 

The estate and gift tax exemption is $5.6 million (up from $5.49 million). 

 

The annual gift exclusion amount is $15,000 (up from $14,000).

 

It is important to note that these numbers are for the tax law as it currently exists.  Tax legislation may be passed by the end of the year that changes some or all of the above numbers.

 

Click here for the official IRS “Revenue Proclamation”.

 

To see the appropriate numbers for 2017 tax returns, click here.

 

 

 

 

 

 

 

 

A TIME FOR GIVING

The upcoming holiday seasons are a time for giving.  So now seems like a good time to review the rules for deducting donations.

 

You can deduct as a charitable contribution on Schedule A (if you are able to itemize):

 

* Cash or property (appliances, books, clothing, computer hardware and software, electronics, furniture, household items, toys, videos, etc.) contributed to a qualified tax -exempt organization created or organized in the US or any possession under the laws of the United States or any state or possession.

 

* Out-of-pocket expenses connected with donations or volunteer service to a qualifying church or charity, such as the cost of the ingredients of homemade cookies or a cake donated to a church bake sale, or the cost and laundering of uniforms for a scoutmaster.

 

* Travel and transportation expenses incurred while performing a volunteer service for a qualifying church or charity. If you use your car you can deduct 14 cents per mile plus any parking fees and tolls.

 

* The portion of the cost of a ticket to a fund-raising event that exceeds of the “fair market value” of goods or services received.  If you buy a ticket for a fund-raising dinner for $100 and the cost of the dinner is $35 you can deduct $65.

 

* Rebates earned on credit card purchases that the cardholder elects to have the credit card company give to a qualified charity. These rebates are not taxable income to the cardholder.

 

The following items are not deductible:

 

* Contributions made directly to an individual or family, regardless of the recipient’s financial or health status.

 

* Contributions to an organization created to lobby for changes to federal, state or local laws.

 

* Contributions to political organizations or election campaigns.

 

* The value of blood donated.

 

* The value of your time to perform volunteer services.

 

* Contributions to non-profit homeowner or condo associations, or social or sports clubs.

 

* Raffle tickets. These can, however, be deducted as gambling losses if you have any gambling winnings to report.

 

* The rental value of the use of a vacation property donated to charity for a  “vacation auction ”.

 

If you plan to make donations to a church or charity AND claim a charitable itemized deduction on your 2017 Schedule A you MUST have -

 

(1) Documentation of your contribution. 

 

(2) A contemporaneous written acknowledgment from the church or charity for any single donation of $250 or more.

 

Acceptable documentation includes-

 

* a cancelled check,

 

* a bank record (i.e. a copy of the front of the check included on your monthly bank statement),

 

* an entry on a bank or credit card statement indicating a credit or debit card charge,

 

* a written acknowledge from the church or charity, or

 

* if you give to the United Way or other charity via payroll deduction a pay stub, Form W-2, or other employer furnished document that sets forth the amount withheld for payment to the charity, along with a pledge card prepared by or at the direction of the charity, will be appropriate documentation.

 

The written acknowledgement from a church or charity must include the organization’s name and address, the date and amount of the contribution, and indicate whether you were provided any goods or services (other than “intangible religious benefits”) in exchange for the donation.  To be able to claim a deduction for the full amount of your contribution the acknowledgement must state - “No goods or services were provided in exchange for the donation”. 

 

To be “contemporaneous” the acknowledgement must be received from the organization before the earlier of the date the original tax return is filed or the extended due date of the tax return.

 

You can claim a deduction for the “fair market value” of new or used items donated to a qualifying church or charity.  According to the IRS, fair market value is the price a “willing, knowledgeable buyer would pay a willing, knowledgeable seller when neither has to buy or sell.”  If you contribute new food, toys, clothing, or other items you can deduct the actual cost of the items donated.

 

You are responsible for determining the fair market value of the items you are donating.  The charity to which you make the donation is not required to provide you with a value.  The same rule discussed above applies if the total value of “non-cash” items donated to a charity in a single day is more than $250.  

 

Whenever you contribute used items you should always make and keep a detailed listing of what you have donated with the condition and value of each set of items (i.e. 6 pairs of men’s pants, good condition, $60, 5 pairs of men’s shoes, good condition, $75).   You cannot deduct the contribution of a used item of clothing or household item unless the item is in at least "good" condition.  Donations of clothing and household items with a minimal monetary value, such as used socks or underwear, are also not deductible.

 

Special rules also apply if you donate a car or marketable securities to a church or charity.  I will discuss these rules in a subsequent post.

 

If you have any questions on charitable giving I suggest your consult your, or a, tax professional.

 

TTFN

 

 

 

 

 

 

COMING ATTRACTIONS

Coming your way in just two weeks – the November 2017 issues of my two e-newsletters ROBERT D FLACH’S 1040 INSIGHTS and L O I S (aka Lots of Interesting Stuff)!

 

The November issue of my ROBERT D FLACH’S 1040 INSIGHTS, which shares my insights on tax deductions, credits, strategies, and issues based on 45 years in “the business”, discusses in detail a variety of tax-saving year-end tax planning ideas, strategies and techniques.  It also includes a compilation of what is new in taxes for 2017 and helpful worksheets. 

 

A one-year (5-issue) subscription to the newsletter is only $11.95 delivered as a pdf email attachment.  A print edition sent via postal mail is available for only $17.95.  One tip from an issue could return the cost of a subscription many times over. 

 

If your order is postmarked by October 31st I will send you the May, July and September 2017 issues as a bonus – so you will receive 8 issues instead of 5. 

 

Or you can order just the November special year-end tax planning issue as an email pdf attachment for only $3.00.

 

In the November 2017 L O I S I discuss –

 

* Avoiding the penalty for underpayment of estimated tax

 

* Broadway sequels

 

* Year-end investment-related "to-dos”

 

* Conservatives and the religious right

 

* Why you make your check for taxes due to “United States Treasury”

 

* British police hierarchy

 

* A visit to San Antonio TX

 

* An interesting website

 

And, hopefully, leave you laughing.

 

L O I S is an “e-newsletter”, and is only available in pdf format delivered as an email attachment.  There is no print version available.

 

An annual subscription to LOIS is only $7.95!   I will send readers of TWTP a copy of the November issue for only $1.00! 

 

Send your order, with check or money order payable to TAXES AND ACCOUNTING, INC, to –

 

TAXES AND ACCOUNTING, INC

TTFN OCTOBER NEWSLEETTER OFFERS

POST OFFICE BOX A

HAWLEY PA 18428

 

TTFN

 

 

 

 

 

 

 

A REVIEW OF RECENT TAX DEVELOPMENTS

The week-day daily “Checkpoint Newsstand” from Thomson Reuters recently provided a good summary of some important tax developments that have occurred in the past three months that affect taxpayers, their investments, and their livelihood. 

 

I have provided some of TR’s summary below, with my own wording replacing theirs in several places, and including some of my own personal comments.

 

(1) The Donald T Rump Administration and select members of Congress have released a "unified framework" for tax reform. The official framework document leaves many specifics to be worked out by the tax-writing committees (i.e., the House Ways and Means Committee and the Senate Finance Committee).

 

The “framework” –

 

* Increase the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers;

 

* Eliminate the personal exemption and the additional standard deductions for older/blind taxpayers;

 

* Reduce the number of tax brackets from seven to three: 12%, 25%, and 35%;

Increase the child tax credit;

 

* Repeal the individual alternative minimum tax;

 

* Largely eliminate itemized deductions, but retain the home mortgage interest and charitable contribution deductions;

 

* Repeal both the estate tax and the generation-skipping transfer tax;

 

* Provide a maximum 25% tax rate for "small" and family-owned businesses conducted as sole proprietorships, partnerships and S corporations;

 

* Reduce the corporate tax rate to 20% (down from the current top rate of 35%);

 

* Provide full expensing for five years;

 

* Partially limit the deduction for net interest expense incurred by C corporations;

 

* Repeal most deductions and credits, but retain the research and low-income housing credits;

 

* Modernize special tax rules that apply to certain industries and sectors;

 

* Provide a 100% exemption for dividends from foreign subsidiaries; and

 

* To protect the U.S. tax base, tax the foreign profits of U.S. multinational corporations at a reduced rate and on a global basis.

 

As mentioned above, the actual details on these proposals have still not yet been determined.  As it is so late in the year it is, in my opinion, doubtful that substantive tax reform legislation will be passed before year-end.  In any case, I do not expect any legislation to affect the 2017 Form 1040.

 

(2) On September 29, the "Disaster Tax Relief and Airport and Airway Extension Act of 2017" (P.L. 115-63) was signed into law. The Act provides temporary tax relief to victims of Hurricanes Harvey, Irma, and Maria.

 

Relief for individuals includes, among other things, loosened restrictions for claiming personal casualty losses, tax-favored withdrawals from retirement plans, and the option of using current or prior year's income for purposes of claiming the earned income and child tax credits.

 

Businesses that qualify for relief may claim a new "employee retention tax credit" of 40% of up to $6,000 of "qualified wages" paid by employers affected by Hurricanes Harvey, Irma, and Maria (for a maximum credit of $2,400 per employee).

 

In addition to the new law, IRS has granted specific administrative hurricane relief, for example, extending various deadlines, encouraging leave-based donation programs for hurricane victims, and allowing retirement plans to make hardship distributions.

 

(3) On July 28, the Treasury Department announced that it would begin winding down the myRA (my Retirement Account) program—a type of government-administered Roth IRA initially offered by Treasury beginning in 2014. Noting that demand for and investment in the myRA program had been extremely low, Treasury stated that it would phase out the program over the following months.

 

The myRA program will no longer accept new enrollments, but existing accounts will to remain open and accessible, so that individuals could continue to manage their accounts until further notice. Individuals can make deposits, and their accounts would continue to earn interest. Funds in myRA accounts remained in an investment issued by the Treasury Department.  I was personally sorry to see this program go.

 

(4) The government announced a simplified per-diem increase for post-Sept. 30, 2017 travel. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&E). If the rate paid doesn't exceed the IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn't subject to income- or payroll-tax withholding and isn't reported on the employee's Form W-2. Instead of using actual per-diems, employers may use a simplified "high-low" per-diem, under which there is one uniform per-diem rate for all "high-cost" areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS.

 

The IRS released the "high-low" simplified per-diem rates for post-Sept. 30, 2017, travel. Under the optional high-low method for post-Sept. 30, 2017 travel, the high-cost-area per diem is $284 (up from $282), consisting of $216 for lodging and $68 for M&IE. The per-diem for all other localities is $191 (up from $189), consisting of $134 for lodging and $57 for M&IE.

 

(5) Apparently an honest mistake is no excuse for incorrectly claimed advance premium tax credit.  The Tax Court ruled that taxpayers who didn't qualify for the premium tax credit under the Affordable Care Act (Obamacare) because their modified adjusted gross income exceeded 400% of the federal poverty level had to repay all the advance premium tax credit paid on their behalf to their insurer.

 

A sympathetic Tax Court noted that while their state health insurance Marketplace may have incorrectly informed the taxpayers that they were eligible for the credit for 2014, the Court's hands were tied by the Code and regulations. The simple fact was that the taxpayers' income exceeded eligible levels and that they had to repay the advance premium tax credit payments.

 

If you have any questions on how the above developments will affect you I suggest you consult your, or a, tax professional.  You can begin your search for a tax professional at my website FIND ATAX PROFESSIONAL. 

 

TTFN

 

 

 

 

 

 

 

 

SO WHAT ABOUT THE MORTGAGE INTEREST DEDUCTION

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 equalization”.

 

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 be kept.

 

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?

 

TTFN

 

 

 

THIS JUST IN!

An important item that I missed in this morning’s BUZZ post.

According to the Social Security Administration (highlights are mine) -

“Monthly Social Security and Supplemental Security Income (SSI) benefits for more than 66 million Americans will increase 2.0 percent in 2018, the Social Security Administration announced today.”

And -

“ . . . the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $128,700 from $127,200.”

Click here for a Fact Sheet on the 2018 changes.


























 

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

Very, very important – you MUST get your extended tax returns in the mail (postmarked) TODAY – even if you cannot afford to send your “uncle(s)” the total amount of any tax due!

 

A “meaty” BUZZ today.

 

* Today at THE TAX PROFESSIONAL - "The AFSP - Boon or Bust?".

 

* For those affected, ACCOUNTING TODAY has a slideshow on “Rebuilding tax records after a disaster”.

 

* 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 -

 

“But 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 dollars.

 

While 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.

 

The 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.

 

* Jeffrey Bartash tells us “Here’s how much Social Security checks could increase in 2018” at MARKET WATCH –

 

“By 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?”

 

* Kay Bell warns that “IRS e-Services is bait in new tax ID theft phishing scheme” – a scheme aimed at tax professionals.

 

Kay tells us –

 

“Everyone — 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.

 

* Kay celebrates Friday the 13^th by staying on the same topic with “Friday the 13th alert: Beware these 13 tax ID theft scams”.

 

She ends the post with two important reminders –

 

“Remember, tax scams don't die. Like Halloween (and TV and movie) zombies, they just keep coming back in new forms in search of more identity theft victims.

 

Remember, too, that tax crooks goblins and ID theft ghouls are out there year-round, not just in Halloween's host month of October.”

 

* Fellow tax pros – I have added a Classified Ad Page to the website THE TAX PROFESSIONAL.

 

* Oops, they did it again! Michael E. Batts reports “Court (Again) Rules Clergy Housing Allowance Exclusion Unconstitutional – Appeal Likely” at the Batts, Morrison, Wales and Lee NONPROFIT SPECIAL ALERT.

 

Peter J Reilly also discusses this development, in more detail, in “Clergy Housing Tax Break Ruled Unconstitutional – Again” at FORBES.COM.

 

How will this affect my one remaining clergy client?  In “5 Takeaways from the Clergy Housing Allowance Ruling” from MANAGING YOUR CHURCH Richard R. Hammar says (highlight is mine) -  

 

“Note 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.

 

* Robert Farrington provides a primer on “What Are Qualified Expenses For A 529 Plan (And What Doesn’t Count)?” at THE COLLEGE INVESTOR.

 

His bottom line -

 

“When 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.

 

Make your college savings work for you!”

 

* FREE! FREE! FREE! New tax e-newsletter - TAX TOPICS.  Check it out!

 

TTFN