Category: Income Tax Planning

Tax Cuts and Jobs Act (TCJA) Overview 1.5

“The new law increases the credit for qualifying children (i.e., children under 17) to $2000 from $1000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit …”

An overview of the Tax Cuts and Jobs Act

The recently enacted Tax Cuts and Jobs Act (TCJA) represents major changes our nation’s tax code.

Here’s a look at some of the more important elements of the new law that have an impact on individuals. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025. That’s right. The next seven (7) years.

 

  • Tax Rates.  The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%,  32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed. The ‘kiddie tax’ rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
  • Standard Deduction.  The new law increases the standard deduction to $24,000 for joint filers, $18,000 for head of household, and $12,000 for single and married taxpayers filing separately. Given these increases, many taxpayers will no longer be itemizing deductions. These figures will be indexed for inflation after 2018.
  • Exemptions.  The new law suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions. The rules for withholding income tax on wages will be adjusted to reflect this change, but IRS was given the discretion to leave the withholding unchanged for 2018.
  • New deduction for “qualified business income.”  Starting in 2018, taxpayers are allowed a deduction equal to 20 percent of “qualified business income,” otherwise known as “pass-through” income, i.e., income from partnerships, S corporations, LLCs and sole proprietorships. The income must be from a trade or business within the U.S. Investment income does not qualify, nor do amounts received from an S Corporation as reasonable compensation or from a partnerships a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $ 157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in, and (2) income from the following trades or businesses is phased out of qualified business income: health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
  • Child and family tax credit.  The new law increases the credit for qualifying children (i.e., children under 17) to $2000 from $1000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer’s dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased tp $200,000 ($400,000 for joint filers).
  • State and local taxes. The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018.
  • Mortgage interest. Under the new tax law, mortgage interest on loans used to acquire a principal residence, and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. And there is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.
  • Miscellaneous itemized deductions. There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses. So, all of your auto expenses, for example, are no longer deductible.
  • Medical expenses. Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.
  • Casualty and theft losses. The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster. So, if you are renter, or a coop or condo or dwelling owner who lacks comprehensive coverage for your personal property, now is the time to purchase coverage.
  • Overall limitation. The new law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds. The itemized deductions of such taxpayers were reduced by 3% of the amount by which AGI exceeded the applicable threshold, but the reduction could not exceed 80% of the total itemized deductions, and certain items were exempt from the limitation.
  • Moving expenses. The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended.
  • Alimony. There is some truth in the old song, “It’s Cheaper To Keep Her.” For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
  • Health care “individual mandate.” Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage. (This will probably lead to fewer Americans purchasing health insurance, and more states reducing or eliminating Medicaid contributions for health care plans.)
  • Estate and gift tax exemption. Effective for decedents dying , and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).
  • Alternative minimum tax (AMT) exemption. The AMT has been retained for individuals by the new law but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.

As you can see from this overview, the new law affects many areas of taxation. I plan to hold at least one (1) public seminars in Brooklyn, to ‘drill down’ into just how the new law will affect you. There will be a fee charged for attendance at these seminars to offset the cost of the venue, and painkillers.

Eustace L. Greaves, Jr., LUTCF is a frequent presenter in the areas of personal insurance, personal income taxation,  and budget and credit strategies for many organizations, including, Neighborhood Housing Services of NYC, Inc., HCCI, Impacct Brooklyn, and Bridge Street Development Corporation. He is a New York State licensed insurance agent and broker, and  NYS Defensive Driving Delivery Agent and Instructor.

You can reach Eustace at [email protected], or 718-783-2722.

 

Charitable Giving Rules | Eustace Greaves Jr.

The average tither or charitable donor making their gifts using checks or cash will find themselves facing massive tax penalties at audit if the charity receiving the gift fails to comply with one of the simplest charitable giving rules.

Why You Should Know The Charitable Giving Rules 

The average tither or charitable donor making their gifts using checks or cash will find themselves facing massive tax penalties at audit if the charity receiving the gift fails to comply with one of the simplest charitable giving rules.

Know The Substantiation Rules Or Suffer The Loss.

Whether you tithe for church, or make charitable donations to other local charities, you must know be aware of the need to substantiate your charitable donations, especially for those gifts in excess of $250.00. While most taxpayers keep copies of their cancelled checks used for their gifts, it is not always enough. Again, for gifts in excess of $250.00, the taxpayer should request and receive a letter acknowledging their charitable contribution (s)  from their church or other charitable organization. This letter, like many I’ve seen from clients while preparing their income tax returns this year, must be on the charity’s letterhead. The date on the letter must precede the date the taxpayer files their return (more on this later). The letter must clearly state the amount donated whether the gift was given in one lump sum, or over the course of the year. Several churches provided a weekly accounting of their member’s giving in their charitable giving letters. Most even included an enlightening Bible verse.

While all of these are great, and required, most of the acknowledgement letters I’ve seen this year fail to include a key requirement of the charitable giving rules.

One Of The Charitable Giving Rules Should Wake You Up At 3 AM

Out of the 32 clients with itemizable charitable gifts this year, only three had the most important line on their receipts or letters of thanks. What’s the line?

The simple statement which reads, “No goods or services were provided by the organization in return for the contribution.”

What’s that you say? I must be kidding, you say?

I am not kidding.

No matter what shape or form your letter of acknowledgement may take, when it lacks a statement clearly stating the gift was given for no reason other than the desire to give, you are actually unable to legally take the deduction for the cash or checks you donated. Your letter is in violation of IRS regulations.

How Would The IRS Find Out?

Several new clients were referred to me this year. One such client had the temerity to tell me it was no big deal, there was no way the IRS could ever check everyone’s charitable giving letters. So I told this client the story about the Durden case (Durden, T. C. Memo 2012-140).

In this case, the taxpayers entered charitable deductions on their Schedule A totaling $25,171. Most of these deductions were made by check to their church. Included in their records were their cancelled checks and an acknowledgement letter from the church.

At audit, the IRS disallowed their deduction because their letter lacked, that’s right,  you guessed it, a statement verifying neither goods nor services were given in exchange for their donations.

So, they went back to their church and got a second letter containing the required statement. They thought just getting another letter, in the proper format, would solve all of their problems.

Wrong.

The IRS rejected the second letter. Why? It did not meet the contemporaneous requirement. In order to meet this requirement, the letter had to have been received by the taxpayer by the earlier of the date their return was filed, or the return’s due date, including any legal extensions. The Tax Court agreed with the IRS. The deduction was disallowed. The taxpayers were slapped with additional taxes, penalties, and interest.


So, of course my new client says “Man, that’s no big deal. One family? That’s nothing.”

Sure. Unless you were also a member of their church who itemized their charitable donations on their Schedule A. See, the IRS knew just where to look.

Look, I don’t go fishing to show off my newest lures. I want to eat fish. I’m going to the lake, stream, or part of the shore where those babies are biting.

It only takes one return for the taxing authorities to discover new reasons to open further investigation.

The $100 Bomb.

If you think you only have to worry if you give small amounts, well, you should know me better by now. You know I’ve got another true story for you.

Several tax seasons ago, a good client of mine asked me include a donation she’d made to a friend’s church. She’d gone to hear the friend sing at a special church service, and her spirit was so moved by her melodious tones, she dropped $100.00, in cash, into the Special Offering plate.

And believe me. I know this lady. When she says she gave $100.00, well, it’s gospel.

Now, she gave me the church’s name, but lacked written proof she’d donated the $100.  At my suggestion, she went back to the church in an attempt to secure an acknowledgement letter from the church for her generous gift prior to our filing her return. She decided to include the $100.00 in her return. Meanwhile, her continued attempts to receive the acknowledgement letter met with futility.

Several months later, (nowadays, with electronic filing, it doesn’t take long for those letters to arrive at your door), she received a letter from the IRS requesting proof of the gift. This was the only item in her entire return the IRS wanted verification for. Unable to comply with their request, the deduction was disallowed, and she had to pay additional tax, penalties and interest.

On a $100.00 cash donation.

The moral of the story? Making donations by check or money order isn’t sinful. Doing so will save you additional taxes at audit. Take a few minutes to review your charitable giving letters to make sure they are in compliance with the law. If they aren’t, request a corrected letter, again bearing a date prior to the date you file your income tax return. I would also suggest the church or charitable organization provide corrected letters to each and every donor. It’s the decent thing to do.

Charitable giving rules, like many IRS rules, aren’t always as easy as they may appear. Take a few minutes to learn more about the charitable giving rules for cash and checks, and clothing, boats, stocks and the like, by reading IRS Publication 526 and Publication 1771.

Happy Filing.

Eustace Greaves, Jr. creates order out of client’s financial chaos using insurance, income tax planning and preparation, and sometimes, just good old divine guidance. Send him your questions, and quote requests to [email protected]. And whatever you do, don’t let his clients know he wrote this post when he’s supposed to be working on their returns and insurance quotes. That’s a check even his body can’t cash.

 

 

Income Tax Games Without A Bow | Brooklyn Covered

So, after dodging the aforementioned honest young lady for several days, I finally admitted that while I’d completed her return, I felt I was making a error somewhere. I just couldn’t understand why she suddenly owed an amount in the thousands when she usually only owed no more than $300.00. And that was considered a bad year.

After much conversation, she finally became very quiet. I just knew I’d lose her as a client. And then, the clouds of doubt and gloom parted when she said, “Mr. Greaves, I think I know why I owe so much.”

Playing Income Tax Games Will Leave You With Your Own Version Of The Hunger Games

So there I was, pacing around the office, the block, the neighborhood, Brooklyn. Trying to figure out why the heck I suddenly found myself unable to complete an income tax return which made sense. I mean, I’ve only been doing this for, what, about 20 years? Then, a propitious conversation with an honest young lady awakened me to the latest version of “Income Tax Games.”

When you’ve prepared someone’s income taxes for a while, you tend to learn “how they roll.” Some of my clients are homeowners who know exactly how many therms they use each month. With many, I’m just glad they put their bills and receipts in the envelope.

Too few contribute to 529’s and Roth IRA’s. Again, far too many fail to contribute the maximum to their employer-sponsored 401k’s. It always cracks me up when they say how hard it is to save now. Just wait until it’s time to retire, they’ll wish they’d done with less now to have more then.

So, when several of my clients suddenly owed amounts to the taxing authorities far and above what I’m accustomed to them owing, I wondered, (foolishly, in hindsight) what did I do wrong?

So, after dodging the aforementioned honest young lady for several days, (“Mr. Greaves, is my return done yet?”), I finally admitted that while I’d completed her return, I felt I was making an error somewhere. I just couldn’t understand why she suddenly owed an amount in the thousands when she usually only owed no more than $300.00. And that was a bad year.

After much conversation, she finally became very quiet. I just knew I’d lose her as a client. And then, the clouds of doubt and gloom parted when she said, “Mr. Greaves, I think I know why I owe so much.”

My only response was “Huh?”

“Mr. Greaves, a friend of mine on my job told me if I wanted to increase the amount of take-home pay each paycheck, all I had to do was increase the number of exemptions I claim for several months, and then go back to, in my particular case, Single, with one exemption.”

DING! DING! DING!

“Youngster, how many extra exemptions did you claim, when did you start claiming them, and, when did you stop claiming them?” I asked.

“I claimed Single, with 20 exemptions, starting in July, ending in November. Then I went back to Single, with one exemption.”

Thank the Maker I don’t have high blood pressure.

“And was the extra money good to you?”

“Man, yeah! I was getting paid!”

“And now?” I asked.

“I have to pay most of it back?”

“Sorry, I didn’t quite hear you.”

“I have to pay most of it back. But why?”

Then we got into a discussion about how the U. S. system of taxation is a pay-as-you-go system. As long as you’re making the necessary payments during the year, you shouldn’t end up owing at the end of the tax year.

She understands that now.

Then she mentioned how this young man, the financial genius who played the exemption game every year, still got a huge refund when he filed his taxes. Their pay was similar, they are both single, and give modest amounts to their churches. Neither one owns real estate, or has any entries for unreimbursed employee expenses. Just two young people with some interest, some stocks sold, and not much else.

I told her his preparer may be one of the biggest crooks out there, and it was probably just a matter of time before the IRS caught him for preparing fraudulent returns. And, when the preparer is caught preparing fraudulent returns, all of their clients will end up in IRS Examinations, and wind up owing a ton of money. With penalties and interest tacked on. 

“So what have we learned today?” I asked.

“To pay a bit each payday as I go along, and at the end of the year I won’t sing a sad song.”

“And will we be playing income tax games any longer?”

“Only if I have a death wish.”

I am revived. Income taxes make sense again. Back to the numbers.

Income Tax Refund Memo | Brooklyn Covered

Thank you for giving us more money during this last year than you were required to. Because of your kindness, we were able to use your refund as well as the pending refunds of millions of your fellow citizens to earn interest. We lent money to countries that may or may not pay us back. We even used some of the money to feed people in other countries who hate our way of life, especially since we ‘allow’ women the sacred rights of driving a car, or going for a walk by themselves. Let’s not even talk about the right to vote.

Tax Refund Memo To All Taxpayers

Dear (Taxpayer, please insert your name here):

Enclosed is your income tax refund of $ (Please fill in your normal annual refund).

Thank you for giving us more money during this last year than you were required to. Because of your financial laziness, oops, we mean kindness, we were able to combine your refund and the pending income tax refunds of millions of your fellow citizens to make loans. We lent money to countries that may or may not pay us back. We even used some of the money to feed people in other countries who hate our way of life, especially since we ‘allow’ women the sacred rights of driving a car, or going for a walk by themselves. Let’s not even talk about the right to vote. We provided funds to banks thought to be too big to fail. That’s right, the same banks that charge you all of those ridiculous fees if you don’t have a certain balance in your savings account. If you can afford to have a savings account. And don’t you dare be late with your credit card payments!

Especially pleasing to us is our ability to offer guaranteed rates of interest to those who, by not allowing us to keep their refunds for up to 15 months, watch their Treasury notes, bills and bonds investments grow. And don’t forget about the foreign investors who are buying Treasuries like ice cream on a hot summer day. Of course you can’t buy those investments since once you get your hot little hands on your refund, you dash to the stores for technology you don’t understand but must have because it’s new, shoes designed to destroy women’s ankles, knees, and reproductive organs just because they make you look good, and cars you can’t afford to maintain, much less pay the insurance for. Just to name a few. So what if you purchase things that really don’t make a significant difference in your life? Heck, they’re shiny and new, and isn’t that all that matters!? So what if you have trouble meeting the rent sometimes, you’re late on a credit card payment or two, or you’ll never save the down payment for the house you dream about. Don’t worry about it. Just keep getting those refunds.

And don’t listen to people like Eustace Greaves Jr. He’s got a big mouth. If it was up to him, you’d employ perfectly legal tax planning methods to bring your future money into the present. Then, you could use what is essentially your money work toward realizing the lifestyle you’ve always imagined. Being able to save, invest, and actually accomplish the important things in life, things that matter, like getting a home of your own, enjoying a secure retirement, having more liquid cash, or sending your children to the college of their choice and ability. What’s Greaves’ motto? “No income tax refund is a good income tax refund!!” Who died and made him king?

But hey, we’re not worried. We know income tax refunds turn you on more than watching your team playing in the Super Bowl every year. (That is, unless the big-screen TV you bought with borrowed money was repossessed. You didn’t have the money to pay the note. Doesn’t matter, you can’t pay the electric bill until you get your refund, anyway.) We know you’ll continue listening to us. So just keep doing what you’re doing and we’ll keep mailing those refund checks.

Thanks, and keep the excess money coming. Don’t worry, we’ll send it back eventually.

       

“An investment in knowledge always pays the best interest.” 

 Benjamin Franklin

10 Top Reasons It’s Time For You To Get A New Income Tax Preparer

So I thought this an opportune time to review my “10 Top Reasons It’s Time For You To Get A New Income Tax Preparer,” list. Then, in my next post, we’ll review why any of these reasons could definitely be a reason for a great deal less holiday joy for years to come.

Ah, the holidays, the holidays…

The leftover Thanksgiving turkey still rumbles in your gut and Black Friday is, for the merchants at least, just a happy memory. We’ve trimmed the Christmas tree, hung the lights, and kept spiking the eggnog.  Then, we took the tree apart and stored the decorations until next years. And now, one special thought begins to fill the minds of people everywhere…

…Income tax filing season is here!

So I thought this an opportune time to review my “10 Top Reasons It’s Time For You To Get A New Income Tax Preparer,” list. Then, in the next three (3) or four (4) posts, we’ll learn why any of these reasons could definitely cause a great deal less holiday joy for years to come.

Let’s just hope there aren’t too many of you already on a first-name basis with an IRA auditor because of your current tax advisor.

Reason number 10:

You own and live in a two-family home. Your tenant pays you $12,000.00 in annual rent, and you have use of 75% of the house. Your preparer, knowing you need a big refund, depreciates the house at 100% and shows only $6,000.00 in rental income for the entire year on your return.

Reason number 9:

You haven’t been to church, any church, in the last 20 years. Yet each and every year, your preparer says you can claim $10,000. For worshiping at a Church named Church.

Reason number 8:

You receive certified, return receipted correspondence from the IRS. When you show it to your preparer, she smiles and tells you not to worry, they just want to make sure you received your thank you note.

Reason number 7:

You’re a receptionist at a medical center. You earn $30,000 each year. Even though you never leave your desk, wear everyday clothes to work, and haven’t seen the inside of a classroom for 20 years, your preparer gives you generous itemized deductions of $9,000.00 for uniforms, $3,000.00 for educational seminars, and $2,000.00 for business-related travel on a Schedule A. Oh, and he reminds you your twice-monthly hair and nail appointments are deductible too.

Reason number 6:

Lost your 1099 Int’s and Div’s? “No worries”, says your preparer. “The IRS doesn’t worry about interest or dividends under $75.”

Reason number 5:

Your return shows three (3) brand-new dependents you’ve never met.

Reason number 4:

Your preparer guarantees you everyone qualifies for the Earned Income Tax Credit. “You earned an income last year, didn’t you?”

Reason number 3:

You ask your preparer if they have a PTIN and an NYPTRIN. He tells you he prefers to drive domestic vehicles.

Reason number 2:

Your preparer relocates each year. Luckily you find them. Again. (See Reason number 8, above)

And now the number one reason “Why It’s Time For You To Get A New Income Tax Preparer,” is:

Your preparer assures you he or she, “Knows how to get you the biggest refund you’ve ever received.”

 The next post will deal with reasons one (1) , two (2) and three (3).

Hey, who said we were going in order.

Until next time, start gathering and itemizing those receipts.

Peace and Blessings,

BrooklynCovered

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