Category Archives:Uncategorized

Jan. 17.

RECENT DEVELOPMENTS THAT MAY AFFECT YOUR TAX SITUATION

RECENT DEVELOPMENTS THAT MAY AFFECT YOUR TAX SITUATION

Business meals…. One of the provisions of the Tax Cuts and Jobs Act (TCJA) disallows a deduction for any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation. However, the TCJA did not address the circumstances in which the provision of food and beverages might constitute entertainment.

The new guidance clarifies that, as in the past, taxpayers generally may continue to deduct 50% of otherwise allowable business meal expenses if:
a. The expense is an ordinary and necessary expense paid or incurred during the tax year in carrying on any trade or business;
b. The expense is not lavish or extravagant under the circumstances;
c. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
d. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
e. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

Convenience of the employer…. IRS provided new guidance under the Code provision allowing for the exclusion of the value of any meals furnished by or on behalf of an individual’s employer if the meals are furnished on the employer’s business premises for the convenience of the employer. IRS determined that the “Kowalski test” — which provides that the exclusion applies to employer-provided meals only if the meals are necessary for the employee to properly perform his or her duties — still applies.

Under this test, the carrying out of the employee’s duties in compliance with employer policies for that employee’s position must require that the employer provide the employee meals for the employee to properly discharge such duties in order to be “for the convenience of the employer”.

While IRS is precluded from substituting its judgment for the business decisions of a taxpayer as to its business needs and concerns and what specific business policies or practices are best suited to addressing such, IRS can determine whether an employer actually follows and enforces its stated business policies and practices, and whether these policies and practices, and the needs and concerns they address, necessitate the provision of meals so that there is a substantial noncompensatory business reason for furnishing meals to employees.

Depreciation and expensing. …IRS provided guidance on deducting expenses under Code Sec. 179(a) and depreciation under the alternate depreciation system (ADS) of Code Sec. 168(g), as amended by the TCJA. The guidance explains how taxpayers can elect to treat qualified real property, as defined under the TCJA, as property eligible for the expense election.

The TCJA amended the definition of qualified real property to mean qualified improvement property and some improvements to nonresidential real property, such as: roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems. The guidance also explains how real property trades or businesses or farming businesses, electing out of the TCJA interest deduction limitations, can change to the ADS for property placed in service before 2018, and provides that such is not a change in accounting method. In addition, the guidance provides an optional depreciation table for residential rental property depreciated under the ADS with a 30-year recovery period.

Partnerships… IRS issued final regulations implementing the new centralized partnership audit regime, which is generally effective for tax years beginning after Dec. 31, 2017 (although partnerships could have elected to have its provisions apply earlier). Under the new rules, adjustments to partnership-related items are determined at the partnership level.

The final regulations clarify that items or amounts relating to transactions of the partnership are partnership-related items only if those items or amounts are shown, or required to be shown, on the partnership return or are required to be maintained in the partnership’s books and records. A partner must, on his or her own return, treat a partnership item in a manner that’s consistent with the treatment of that item on the partnership’s return.

The regulations clarify that so long as a partner notifies the IRS of an inconsistent treatment, in the form and manner prescribed by the IRS, by attaching a statement to the partner’s return (including an amended return) on which the partnership-related item is treated inconsistently, this consistency requirement is met, and the effect of inconsistent treatment does not apply to that partnership-related item.

If IRS adjusts any partnership-related items, the partnership, rather than the partners, is subject to the liability for any imputed underpayment and will take any other adjustments into account in the adjustment year. As an alternative to the general rule that the partnership must pay the imputed underpayment, a partnership may elect to “push out” the adjustments, that is, elect to have its reviewed year partners consider the adjustments made by the IRS and pay any tax due as a result of these adjustments.

State & local taxes…. IRS has provided safe harbors allowing a deduction for certain payments made by a C corporation or a “specified pass-through entity” to or for the use of a charitable organization if, in return for such payment, they receive or expect to receive a state or local tax credit that reduces a state or local tax imposed on the entity.

Such payment is treated as meeting the requirements of an ordinary and necessary business expense. For tax years beginning after Dec. 31, 2017, the TCJA limits an individual’s deduction to $10,000 ($5,000 in the case of a married individual filing a separate return) for the aggregate amount of the following state and local taxes paid during the calendar year:
1. Real property taxes;
2. Personal property taxes;
3. Income, war profits, and excess profits taxes, and
4. General sales taxes.

This limitation does not apply to certain taxes that are paid and incurred in carrying on a trade or business or a for-profit activity. An entity will be considered a specified pass-through entity only if:
1. The entity is a business entity other than a C corporation that is regarded for all federal income tax purposes as separate from its owners;
2. The entity operates a trade or business;
3. The entity is subject to a state or local tax incurred in carrying on its trade or business that is imposed directly on the entity; and
4. In return for a payment to a charitable organization, the entity receives or expects to receive a state or local tax credit that the entity applies or expects to apply to offset a state or local tax described in (3), above, other than a state or local income tax.
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Personal exemption suspension…. IRS provided guidance clarifying how the suspension of the personal exemption deduction from 2018 through 2025 under the TCJA applies to certain rules that referenced that provision and were not also suspended. These include rules dealing with the premium tax credit and, for 2018, the individual shared responsibility provision (also known as the individual mandate).

Under the TCJA, for purposes of any other provision, the suspension of the personal exemption (by reducing the exemption amount to zero) is not be considered in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction.

Obamacare hardship exemptions…. IRS guidance identified additional hardship exemptions from the individual shared responsibility payment (also known as the individual mandate) which a taxpayer may claim on a Federal income tax return without obtaining a hardship exemption certification from the Health Insurance Marketplace (Marketplace).

Under the Affordable Care Act (ACA, or Obamacare), if a taxpayer or an individual for whom the taxpayer is liable isn’t covered under minimum essential coverage for one or more months before 2019, then, unless an exemption applies, the taxpayer is liable for the individual shared responsibility payment.

Under the guidance, a person is eligible for a hardship exemption if the Marketplace determines that:
i. He or she experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he or she had a significant, unexpected increase in essential expenses that prevented him or her from obtaining coverage under a qualified health plan;
ii. The expense of purchasing a qualified health plan would have caused him or her to experience serious deprivation of food, shelter, clothing, or other necessities; or
iii. He or she has experienced other circumstances that prevented him or her from obtaining coverage under a qualified health plan.
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Certain Obamacare due dates extended…. IRS has extended one of the due dates for the 2018 information reporting requirements under the ACA for insurers, self-insuring employers, and certain other providers of minimum essential coverage, and the information reporting requirements for applicable large employers (ALEs).

Specifically, the due date for furnishing to individuals the 2018 Form 1095-B (Health Coverage) and the 2018 Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) is extended to Mar. 4, 2019. Good-faith transition relief from certain penalties for 2018 information reporting requirements is also extended.

Limitation on deducting business interest expense… IRS has provided a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses (such as airports, ports, mass commuting facilities, and sewage and waste disposal facilities) as real property trades or businesses solely for purposes of qualifying as an electing real property trade or business.

For tax years beginning after Dec. 31, 2017, the TCJA provides that a deduction allowed for business interest for any tax year can’t exceed the sum of:
1. The taxpayer’s business interest income for the tax year;
2. 30% of the taxpayer’s adjusted taxable income for the tax year; plus
3. The taxpayer’s floor plan financing interest (certain interest paid by vehicle dealers) for the tax year.

The term “business interest” generally means any interest properly allocable to a trade or business, but for purposes of the limitation on the deduction for business interest, it doesn’t include interest properly allocable to an “electing real property trade or business”. Thus, interest expense that is properly allocable to an electing real property trade or business is not properly allocable to a trade or business and is not business interest expense that is subject to the interest limitation.
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Avoiding penalties… IRS has identified the circumstances under which the disclosure on a taxpayer’s income tax return with respect to an item or position is adequate for the purpose of reducing the understatement of income tax under the substantial understatement accuracy-related penalty for 2018 income tax returns.

The guidance provides specific descriptions of the information that must be provided for itemized deductions on Form 1040 (Schedule A); certain trade or business expenses; differences in book and income tax reporting; and certain foreign tax and other items.

The guidance notes that money amounts entered on a form must be verifiable, and the information on the return must be disclosed in the manner set out in the guidance. An amount is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by the IRS) and the taxpayer can show good faith in entering that number on the applicable form.

If the amount of an item is shown on a line of a return that does not have a preprinted description identifying that item (such as on an unnamed line under an “Other Expense” category), the taxpayer must clearly identify the item by including the description on that line. If an item is not covered by this guidance, disclosure is adequate with respect to that item only if made on a properly completed Form 8275 (Disclosure Statement) or 8275-R (Regulation Disclosure Statement), as appropriate, attached to the return for the year or to a qualified amended return.

Oct. 19.

Careful Planning of Year-end transactions is Essential to maximizing tax savings !!!

Although plenty of people have made money on the stock market this year, there are many others who have recognized losses on securities, or may be thinking of bailing out of other holdings that show paper losses.

It is critical to plan  the most appropriate year-end planning strategy for an individual’s capital gains and losses will depend on a series of factors, including the amount of regular taxable income, the tax rate that applies to the individual’s “adjusted net capital gain”, whether recognized capital gains are long- or short-term, and whether there are unrealized capital losses.

Capital gain and loss basics. As explained in more detail below, an individual’s “adjusted net capital gain” is taxed at maximum rates of 0%, 15%, or 20%. “Adjusted net capital gain” is net capital gain plus qualified dividend income, minus specified types of long-term capital gain that are taxed at a maximum rate of 28% (gain on the sale of most collectibles and the unexcluded part of gain on Code Sec. 1202 small business stock) or 25% (“unrecaptured section 1250 gain”—i.e., gain attributable to real estate depreciation). “Net capital gain” is the excess of net long-term capital gains (from sales or exchanges of capital assets held for over one year) over net short-term capital losses for a tax year. Net short term capital gains (i.e., from the sales of capital assets held for one year or less before being sold) are taxed as ordinary income.

Long-term capital losses are used to offset long-term capital gains before they are used to offset short-term capital gains. Similarly, short-term capital losses must be used to offset short-term capital gains before they are used to offset long-term capital gains. Noncorporate taxpayers may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income (AGI).

Capital gain tax rates. As a result of the Tax Cuts and Jobs Act (TCJA; P.L. 1115-97, 12/22/2017), for 2018 through 2025, the taxpayer’s ordinary income tax rates are not factors in determining how adjusted net capital gain is taxed. Instead, the rates that apply to such gain are determined with reference to dollar amounts set forth in the Code (subject to inflation adjustment after 2018). (Code Sec. 1(j)(5))

For 2018:

 

  • The 0% tax rate applies to adjusted net capital gain to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” ($77,200 for joint filers and surviving spouses, $51,700 for heads of household, $38,600 for single filers, $38,600 for married taxpayers filing separately, and $2,600 for estates and trusts);
  • The 15% tax rate applies to adjusted net capital gain to the extent that it, when added to regular taxable income, is over the amount subject to the 0% rate, but is not more than the “maximum 15% rate amount” ($479,000 for joint filers and surviving spouses, $452,400 for heads of household, $425,800 for single filers, $239,500 for married taxpayers filing separately, and $12,700 for estates and trusts); and
  • The 20% tax rate applies to adjusted net capital gain to the extent that it, when added to regular taxable income, is over $479,000 for joint filers and surviving spouses, $452,400 for heads of household, $425,800 for single filers, $239,500 for married taxpayers filing separately, and $12,700 for estates and trusts. (Code Sec. 1(h)(1); Code Sec. 1(j)(5)(A))

Illustration (1): For 2018, Mr. and Mrs. Smith have $75,000 of taxable income exclusive of capital gains, plus $8,000 of long-term capital gains from the sale of stock. They have no other capital gains and losses for the year.

  • A zero (0%) tax rate applies to $2,200 of their long-term capital gain ($77,200 – $75,000); and
  • A 15% rate applies to $5,800 of their long-term capital gain ($8,000 – the $2,200 that is subject to the 0% tax rate).

Thus, the tax on the Smiths’ $8,000 of long-term capital gain is $870 (15% of $5,800).

Under Code Sec. 1411, there is a 3.8% surtax on net investment income (including capital gains) of noncorporate taxpayers whose modified adjusted gross income exceeds $250,000 for joint filers and surviving spouses, $125,000 for separate filers, and $200,000 in all other cases. If this surtax applies, it will result in a maximum tax rate of either 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) on adjusted net capital gain, depending on taxable income.

Year-end strategies for capital gains and losses. Keeping in mind that investment factors are paramount when deciding to sell or hold capital assets, here are year-end strategies that can produce significant tax savings.

 

  1. Taxpayers whose 2018 taxable income from long-term capital gains and other sources is below the zero rate amount should try to avoid recognizing long-term capital losses before year end as they may receive no benefit from those losses.

Illustration (2): For 2018, if marrieds filing jointly have $70,000 of taxable income exclusive of capital gains, plus $5,000 of long-term capital gain from the sale of stock earlier this year, none of that gain will be taxed. If they unload mutual fund shares showing a $5,000 long-term paper loss, they will receive not a tax benefit from that loss.

  1. Taxpayers whose 2018 taxable income will be below the zero rate amount should consider recognizing enough long-term capital gains before year-end to take advantage of the 0% rate. For example, joint filers who anticipate having $67,000 of taxable income for this year, exclusive of capital gains, could recognize up to $10,200 of long-term capital gains before year end, and none of the gain would be subject to tax ($77,200 zero rate amount – $67,000).
  2. Taxpayers who have no capital gains should consider selling enough loss securities to yield a $3,000 capital loss, which can be used to offset ordinary income.
  3. Taxpayers should consider selling capital assets showing a long-term gain this year rather than next if their gains would be subject to a higher capital gain tax rate next year. Conversely, taxpayers should put off recognizing long-term capital gains if next year’s capital gain tax rate is likely to be lower.
  4. Time long-term capital losses for maximum effect. A taxpayer should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they are used to offset short-term capital gains. To do this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains are taken. However, this is not just a tax issue. As is the case with most planning involving capital gains and losses, investment factors need to be considered. A taxpayer won’t want to defer recognizing gain until the following year if there’s too much risk that the value of the property will decline before it can be sold. Similarly, a taxpayer won’t want to risk increasing the loss on property that he expects will continue to decline in value by deferring the sale of that property until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, the taxpayer should take steps to prevent those losses from offsetting those gains.

Additionally, it may pay for taxpayers who have already realized short- and long-term capital gains for 2018 to accelerate the sale of depreciated-in-value capital assets so that they yield a short-term rather than a long-term capital loss.

Illustration (3): Jennifer invested $10,000 in Crypto stock on Nov. 4, 2017. In September 2018, the value of the stock has dropped to $2,000. Jennifer thinks the chances of the stock increasing in value are slim so she plans to sell it. Jennifer is in the top 37% income tax bracket and also will be subject to the 3.8% surtax on net investment income. Earlier in 2018, she recognized short-term capital gains of $15,000 facing a tax of 40.8% (37% + 3.8%), and long-term capital gains of $20,000 facing a tax of 23.8% (20% + 3.8%). She does not anticipate any other trades for the year.

If Jennifer sells the Crypto stock before Nov. 5, 2018, she will recognize a short-term capital loss of $8,000 (assuming no change in value). This loss will offset $8,000 of her short-term capital gains for the year, thus producing a $3,264 ($8,000 × 40.8%) tax savings.

If, on the other hand, Jennifer waits and sells the stock after Nov. 4 but before Jan. 1, 2019, she will recognize an $8,000 long-term loss (assuming no change in value occurs). This loss will offset $8,000 of her long-term capital gains in the year of the sale, thus producing a $1,904 ($8,000 × 23.8%) tax savings.

By selling the Crypto stock before Nov. 5, 2018, and generating a short-term capital loss, Jennifer saves an additional $1,360 ($3,264 – $1,904) in taxes because of the difference in the tax rates applied to her short-term (40.8%) and long-term (23.8%) capital gains.

Preserve investment position after recognizing gain or loss on stock. For the reasons outlined above, paper losses or gains on stocks may be worth recognizing this year in some situations. But suppose the stock is also an attractive investment worth holding onto for the long term. There is no way to precisely preserve a stock investment position while at the same time gaining the benefit of the tax loss, because the so-called “wash sale” rule precludes recognition of loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the date of sale). Thus, a taxpayer can’t sell the stock to establish a tax loss and simply buy it back the next day. However, a taxpayer can substantially preserve an investment position while realizing a tax loss by using one of these techniques:

 

  • Double up. Buy more of the same stocks or bonds, then sell the original holding at least 31 days later. The risk here is of further downward price movement.
  • Sell the original holding and then buy the same securities at least 31 days later.
  • Sell the original holding and buy similar securities in different companies in the same line of business. This approach trades on the prospects of the industry as a whole, rather than the particular stock held.
  • In the case of mutual fund shares, sell the original holding and buy shares in another mutual fund that uses a similar investment strategy. A similar strategy can be used with Exchange Traded Funds.

Planning Idea….. The wash sale rule applies only when securities are sold at a loss. As a result, a taxpayer may recognize a paper gain on stock in 2018 for year-end planning purposes and then buy it back at any time without having to worry about the wash sale rule.

 

Jan. 17.

What the House tax bill holds for individuals…. A New “Game”

What the House tax bill holds for individuals

 

H.R. 1, known as the Tax Cuts and Jobs Act, which both houses of Congress passed on Dec. 20, contains a large number of provisions that affect individual taxpayers. However, to keep the cost of the bill within Senate budget rules, all of the changes affecting individuals expire after 2025. At that time, if no future Congress acts to extend H.R. 1’s provision, the individual tax provisions would sunset, and the tax law would revert to its current state.

Here is a look at many of the provisions in the bill affecting individuals.

Tax rates

For tax years 2018 through 2025, the following rates apply to individual taxpayers:

Single taxpayers

Taxable income over But not over Is taxed at
$0 $9,525 10%
$9,525 $38,700 12%
$38,700 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $500,000 35%
$500,000   37%

Heads of households

Taxable income over But not over Is taxed at
$0 $13,600 10%
$13,600 $51,800 12%
$51,800 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $500,000 35%
$500,000   37%

Married taxpayers filing joint returns and surviving spouses

Taxable income over But not over Is taxed at
$0 $19,050 10%
$19,050 $77,400 12%
$77,400 $165,000 22%
$165,000 $315,000 24%
$315,000 $400,000 32%
$400,000 $600,000 35%
$600,000   37%

Married taxpayers filing separately

Taxable income over But not over Is taxed at
$0 $9,525 10%
$9,525 $38,700 12%
$38,700 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $300,000 35%
$300,000   37%

Estates and trusts

Taxable income over But not over Is taxed at
$0 $2,550 10%
$2,550 $9,150 24%
$9,150 $12,500 35%
$12,500   37%

Special brackets will apply for certain children with unearned income.

 

The system for taxing capital gains and qualified dividends did not change under the act, except that the income levels at which the 15% and 20% rates apply were altered (and will be adjusted for inflation after 2018). For 2018, the 15% rate will start at $77,200 for married taxpayers filing jointly, $51,700 for heads of household, and $38,600 for other individuals. The 20% rate will start at $479,000 for married taxpayers filing jointly, $452,400 for heads of household, and $425,800 for other individuals.

Standard deduction: The act increased the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers was not changed by the act.

Personal exemptions: The act repealed all personal exemptions through 2025. The withholding rules will be modified to reflect the fact that individuals can no longer claim personal exemptions.

Passthrough income deduction

For tax years after 2017 and before 2026, individuals will be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. (Special rules would apply to specified agricultural or horticultural cooperatives.)

A limitation on the deduction is phased in based on W-2 wages above a threshold amount of taxable income. The deduction is disallowed for specified service trades or businesses with income above a threshold.

For these purposes, “qualified business income” means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. These items must be effectively connected with the conduct of a trade or business within the United States. They do not include specified investment-related income, deductions, or losses.

“Qualified business income” does not include an S corporation shareholder’s reasonable compensation, guaranteed payments, or — to the extent provided in regulations — payments to a partner who is acting in a capacity other than his or her capacity as a partner.

“Specified service trades or businesses” include any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees.

The exclusion from the definition of a qualified business for specified service trades or businesses phases out for a taxpayer with taxable income in excess of $157,500, or $315,000 in the case of a joint return.

 

For each qualified trade or business, the taxpayer is allowed to deduct 20% of the qualified business income for that trade or business. Generally, the deduction is limited to 50% of the W-2 wages paid with respect to the business. Alternatively, capital-intensive businesses may get a higher benefit under a rule that takes into consideration 25% of wages paid plus a portion of the business’s basis in its tangible assets. However, if the taxpayer’s income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 20% of the qualified business income for each respective trade or business.

Child tax credit

The act increased the amount of the child tax credit to $2,000 per qualifying child. The maximum refundable amount of the credit is $1,400. The act also created a new nonrefundable $500 credit for qualifying dependents who are not qualifying children. The threshold at which the credit begins to phase out was increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.

Other credits for individuals

The House version of the bill would have repealed several credits that are retained in the final version of the act. These include:

  • The Sec. 22 credit for the elderly and permanently disabled;
  • The Sec. 30D credit for plug-in electric drive motor vehicles; and
  • The Sec. 25 credit for interest on certain home mortgages.

The House bill’s proposed modifications to the American opportunity tax credit and lifetime learning credit also did not make it into the final act.

Education provisions

The act modifies Sec. 529 plans to allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather than on a per-account basis.

The act modified the exclusion of student loan discharges from gross income by including within the exclusion certain discharges on account of death or disability.

The House bill’s provisions repealing the student loan interest deduction and the deduction for qualified tuition and related expenses were not retained in the final act.

The House bill’s proposed repeal of the exclusion for interest on Series EE savings bonds used for qualified higher education expenses and repeal of the exclusion for educational assistance programs also did not appear in the final act.

 

Itemized deductions

The act repealed the overall limitation on itemized deductions, through 2025.

Mortgage interest: The home mortgage interest deduction was modified to reduce the limit on acquisition indebtedness to $750,000 (from the prior-law limit of $1 million).

A taxpayer who entered into a binding written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017, under this provision, meaning that he or she will be allowed the prior-law $1 million limit.

Home-equity loans: The home-equity loan interest deduction was repealed through 2025.

State and local taxes: Under the act, individuals are allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes.

The conference report on the bill specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.

Casualty losses: Under the act, taxpayers can take a deduction for casualty losses only if the loss is attributable to a presidentially declared disaster.

Gambling losses: The act clarified that the term “losses from wagering transactions” in Sec. 165(d) includes any otherwise allowable deduction incurred in carrying on a wagering transaction. This is intended, according to the conference report, to clarify that the limitation of losses from wagering transactions applies not only to the actual costs of wagers, but also to other expenses the taxpayer incurred  in connection with his or her gambling activity.

Charitable contributions: The act increased the income-based percentage limit for charitable contributions of cash to public charities to 60%. It also denies a charitable deduction for payments made for college athletic event seating rights. Finally, it repealed the statutory provision that provides an exception to the contemporaneous written acknowledgment requirement for certain contributions that are reported on the donee organization’s return — a prior-law provision that had never been put in effect because regulations were never issued.

Miscellaneous itemized deductions: All miscellaneous itemized deductions subject to the 2% floor under current law are repealed through 2025 by the act.

Medical expenses: The act reduced the threshold for deduction of medical expenses to 7.5% of adjusted gross income for 2017 and 2018.

 

 

Other provisions for individuals

Alimony: For any divorce or separation agreement executed after Dec. 31, 2018, the act provides that alimony and separate maintenance payments are not deductible by the payer spouse. It repealed the provisions that provided that those payments were includible in income by the payee spouse.

Moving expenses: The moving expense deduction is repealed through 2025, except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station.

Archer MSAs: The House bill would have eliminated the deduction for contributions to Archer medical savings accounts (MSAs); the final act did not include this provision.

Educator’s classroom expenses: The final act did not change the allowance of an above-the-line $250 deduction for educators’ expenses incurred for professional development or to purchase classroom materials.

Exclusion for bicycle commuting reimbursements: The act repealed through 2025 the exclusion from gross income or wages of qualified bicycle commuting expenses.

Sale of a principal residence: The act did not change the current rules regarding exclusion of gain from the sale of a principal residence.

Moving expense reimbursements: The act repealed through 2025 the exclusion from gross income and wages for qualified moving expense reimbursements, except in the case of a member of the armed forces on active duty who moves pursuant to a military order.

IRA recharacterizations: The act excludes conversion contributions to Roth IRAs from the rule that allows IRA contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA. This is designed to prevent taxpayers from using recharacterization to unwind a Roth conversion.

Estate, gift, and generation-skipping transfer taxes

The act doubles the estate and gift tax exemption for estates of decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026. The basic exclusion amount provided in Sec. 2010(c)(3) increased from $5 million to $10 million and will be indexed for inflation occurring after 2011.

 

 

Individual AMT

While the House version of the bill would have repealed the alternative minimum tax (AMT) for individuals, the final act kept the tax, but increased the exemption.

For tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026, the AMT exemption amount increases to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return) and $70,300 for all other taxpayers (other than estates and trusts). The phaseout thresholds are increased to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers (other than estates and trusts). The exemption and threshold amounts will be indexed for inflation.

Individual mandate

The act reduces to zero the amount of the penalty under Sec. 5000A, imposed on taxpayers who do not obtain health insurance that provides at least minimum essential coverage, effective after 2018.

Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor-in-chief, tax.

 

Mar. 10.

2017 Health Care Reform: Draft Republican bill …off we go !!

2017 Health Care Reform: Draft Republican bill would replace Obamacare and include age-based health insurance credit

Draft budget reconciliation bill for 2017 fiscal year (Feb. 10, 2017)..” We have to start somewhere..”

A draft reconciliation bill that was recently leaked to the press provides significant insight into the Republican strategy to repeal and replace the Affordable Care Act (ACA, or Obamacare). The bill would repeal the individual and employer mandates and the premium tax credit and enact a new health insurance coverage credit that varies depending on the age, rather than the income, of the individual. It would also repeal the 3.8% net investment income tax and the 0.9% additional Medicare surtax.

 Background…Back on January 13, Congress approved a budget reconciliation resolution that instructed the relevant committees—i.e., the House Committee on Ways and Means, the House Energy and Commerce Committee, the Senate Finance Committee, and the Senate Committee on Health, Education, Labor, and Pensions—to come up with legislation by Jan. 27 to repeal the ACA. The effect of this measure was to reduce the necessary Senate votes from 60 to 51 to approve the repeal legislation. This draft bill may well have originated from one of these committees, but there is no indication at this point which committee(s) or politician(s) wrote it or how much support it has. In addition, as the draft is dated February 10th, it may not represent the most recent Republican consensus and any final version, if issued, may contain changes.

ACA repeal. The draft legislation (cited as “Bill Sec.” throughout) would repeal virtually all of the ACA, including the following tax provisions:

  • The individual mandate under Code Sec. 5000A-by making the penalty amounts zero, effective for months beginning after Dec. 31, 2015. (Bill Sec. 205)
  • The employer mandate under Code Sec. 4980H-by reducing the penalty amounts to zero, effective for months beginning after Dec. 31, 2015. (Bill Sec. 206)
  • The premium tax credit under Code Sec. 36B would be repealed for tax years beginning after Dec. 31, 2019, and would be modified for prior years by, among other things, removing the repayment limits for excess advance payments, and modifying the applicable percentage tables in Code Sec. 36B(b)(3) (which essentially determine a taxpayer’s eligibility for the premium tax credit based on the percentage of income that the cost of health insurance premiums represents, for taxpayers with household incomes of 100% to 400% of the federal poverty line) to also take into account the taxpayer’s age. (Bill Secs. 201 – 203)
  • The 3.8% net investment income tax (NIIT) under Code Sec. 1411, effective for tax years beginning after Dec. 31, 2016. (Bill Sec. 218)
  • The 0.9% additional Medicare tax under Code Sec. 3101(b)(2), effective with respect to remuneration received after, and tax years beginning after Dec. 31, 2016. (The draft has a notation stating “[confirm this date]” at the end of the effective date provision.) (Bill Sec. 216)
  • The higher floor for medical expense deductions under Code Sec. 213(a), effective for tax years beginning after Dec. 31, 2016. The 7.5% floor that was previously in place would be restored. (Bill Sec. 215)
  • The small employer health insurance credit under Code Sec. 45R, effective for amounts paid or incurred in tax years after Dec. 31, 2019. (Bill Sec. 204)
  • The limitation on health FSA contributions, for tax years beginning after Dec. 31, 2016. (Bill Sec. 210)
  • The so-called “Cadillac” tax on high cost employer-sponsored health plans under Code Sec. 4980I, effective for tax years beginning after Dec. 31, 2019. (Bill Sec. 207)
  • The exclusion from “qualified medical expenses” of over-the-counter medications, for Health Savings Account (HSA), Archer Medical Savings Account (MSA), Health Flexible Spending Arrangement (FSA), and Health Reimbursement Arrangement (HRA) purposes, effective for amounts paid, and expenses incurred, with respect to tax years beginning after Dec. 31, 2016. (Bill Sec. 208)
  • The increased additional tax on HSAs and Archer MSAs for distributions not used for qualified medical expenses, effective for distributions made after Dec. 31, 2016. (Bill Sec. 209) The percentages would be reduced from 20% to 10% and 15%, respectively.
  • The annual fee imposed on branded prescription drug sales, for calendar years beginning after Dec. 31, 2016 (Bill Sec. 211)
  • The medical device excise tax under Code Sec. 4191, for sales after Dec. 31, 2017. (Bill Sec. 212)
  • The annual fee on health insurance providers, for sales after Dec. 31, 2016. (Bill Sec. 213)
  •  Update…This fee is currently suspended for the 2017 calendar year.
  • The elimination of a deduction for expenses allocable to Medicare Part D subsidy under Code Sec. 139A, effective for tax years beginning after Dec. 31, 2016. (Bill Sec. 214)
  • The 10% tanning tax under Code Sec. 5000B, effective for services performed after Dec. 31, 2016. (Bill Sec. 217)
  • The disallowance under Code Sec. 162(m)(6) of any deduction for “applicable individual remuneration” in excess of $500,000 paid to an applicable individual by certain health insurers, for tax years beginning after Dec. 31, 2016. (Bill Sec. 219)
  • A number of provisions relating to the economic substance rules, effective for transactions entered into, and to underpayments, understatements, or refunds and credits attributable to transactions entered into, after Dec. 31, 2016, including:
    1. The codification of the economic substance doctrine under Code Sec. 7701(o),
    2. The Code Sec. 6662(b)(6) penalty for transactions lacking economic substance,
    3. The Code Sec. 6662(i) increased penalty for nondisclosed noneconomic substance transactions, and
    4. The Code Sec. 6664(c)(2) and Code Sec. 6664(d)(2) exclusions from the reasonable cause and good faith exceptions to the accuracy-related and fraud penalties for transactions lacking economic substance. (Bill Sec. 220)

Replacement. The bill would create a new Code Sec. 36C refundable tax credit for health insurance coverage. The credit would generally equal the lesser of the sum of the applicable monthly credit amounts (below) or the amount paid by the taxpayer for “eligible health insurance” for the taxpayer and qualifying family members. It would be subject to a $14,000 aggregate annual dollar limitation with respect to the taxpayer and the taxpayer’s qualifying family members. Monthly credit amounts would be taken into account only with respect to the five oldest qualifying individuals of the family.

The monthly credit amount with respect to any individual for any “eligible coverage month” (in general, a month when the individual is covered by eligible health insurance and is not eligible for “other specified coverage”, such as coverage under a group health plan or under certain governmental programs, like Medicare and Medicaid) during any tax year would be 1/12 of:

  1. $2,000 for an individual who has not attained age 30 as of the beginning of the tax year;
  2. $2,500 for an individual age 30 – 39;
  3. $3,000 for an individual age 40 – 49;
  4. $3,500 for an individual age 50 – 59; and
  5. $4,000 for an individual age 60 and older.

The above amounts, which are available to qualified individuals regardless of their income levels, would be subject to annual inflation adjustments.

The bill also provided special rules for, among other things, coordinating the credit with the medical expense deduction under Code Sec. 213, and calculating the credit where the taxpayer (or any qualifying family member) has a “qualified small employer health reimbursement arrangement” under Code Sec. 9831(d)(2) (see Weekly Alert ¶ 14 12/15/2016 and ¶ 22 for more details on small employer HRAs). (Bill Sec. 221(a)

The bill would also create a new Code Sec. 7529, which would direct a number of Agency heads to consult and establish a program for making payments to providers of eligible health insurance for taxpayers eligible for the new Code Sec. 36C credit. It would also create a new Code Sec. 7530, which would provide a mechanism under which “excess” credit amounts (generally, the amount, if any, by which the credit amount exceeds the amount paid for coverage) can, at the taxpayer’s request, be contributed to a designated HSA of the taxpayer. (Bill Sec. 221(b)) Reporting requirements relating to the health insurance coverage credit would be provided by new Code Sec. 6050X, and penalties for failure to meet the requirements would be added to Code Sec. 6724(d). (Bill Sec. 221(c))

The above provisions pertaining to the new health insurance coverage credit would apply to tax years beginning after Dec. 31, 2019.

In addition, the bill would add a new subsection, Code Sec. 106(h), which would require the inclusion in income of “excess coverage” under employer-provided health coverage. Essentially, a taxpayer would be required to include in gross income the amount for any month by which his or her “specified employer-provided health coverage” for that month exceeds 1/12 of the “annual limitation”, which is an amount determined by IRS to be equal to the 90th percentile of annual premiums for self-only, or other-than-self-only, coverage in 2019 (and adjusted for inflation thereafter). (Bill Sec. 222) Specific rules for computing the total amount of coverage, such as the treatment of health FSAs, as well as exceptions, are provided.

A similar provision would be added to limit the deduction of health insurance costs by self-employed individuals to the 90th percentile amount. (Code Sec. 162(l)(2)) (Bill Sec. 222)

The above provisions would be effective for tax years beginning after Dec. 31, 2019.

The bill would also:

  • Increase the maximum HSA contribution limit to the sum of the amount of the deductible and out-of-pocket limitation, effective for tax years beginning after Dec. 31, 2017; (Bill Sec. 223)
  • Allow both spouses to make “catch-up contributions” to the same HSA, effective for tax years beginning after Dec. 31, 2017; (Bill Sec. 225)
  • Provide a special rule under which, if an HSA is established within 60 days of the date that certain medical expenses are incurred, it will be treated as having been in place for purposes of determining if the expense is a “qualifying medical expense”. (Bill Sec. 226)

Observations…As you can see this bill will take a lot of twists and turns before we get a FINAL  Health care bill.

At first blush..it is a start! Not a final product..

STAY TUNED…!!!

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Aug. 30.

California Real Estate professionals….Watch out for this new ruling !

Real estate professional status didn’t make rental losses automatically deductible !!

 

Gragg vs. U.S., (CA 9 8/4/2016) 118 AFTR 2d ¶ 2016-5091

The Court of Appeals for the Ninth Circuit, affirming the district court, has held that for purposes of the passive activity loss (PAL) rules, the taxpayer’s status as a real estate professional under Code Sec. 469(c)(7) did not make her rental losses automatically nonpassive. She still had to prove material participation in her real estate rental activities in order to deduct those losses from her nonpassive income.

Background on PAL rules. In general, under the PAL rules of Code Sec. 469, losses from passive activities may only be used to offset passive activity income. Code Sec. 469(c)(1) provides that a “passive activity” is any activity which involves the conduct of any trade or business, and in which the taxpayer does not materially participate. A taxpayer is treated as materially participating in an activity if he meets at least one of the seven tests in Reg. § 1.469-5T. For example, under one of these tests, an individual will be treated as materially participating in an activity for a tax year if the individual participates in the activity for more than 500 hours during such year. (Reg. § 1.469-5T(a)(1))

In general, under Code Sec. 469(c)(2), a rental activity is per se a passive activity regardless of the taxpayer’s participation in the activity. However, under Code Sec. 469(c)(7), the per se rule for rental activities doesn’t apply to a qualifying real estate professional. A taxpayer qualifies as such for a particular tax year if:

  1. More than half of the personal services that he performs during that year are performed in real property trades or businesses in which he materially participates; and
  2. He performs more than 750 hours of services during that tax year in real property trades or businesses in which he materially participates. (Code Sec. 469(c)(7)(B))

Reg. § 1.469-9(e)(1) states that a taxpayer who qualifies as a real estate professional can treat rental losses as nonpassive, but only if he materially participates. Specifically, the reg provides:

Code Sec. 469(c)(2) [i.e., the per se rental bar] does not apply to any rental real estate activity of a taxpayer for a taxable year in which the taxpayer is a qualifying taxpayer under paragraph (c) of this section [i.e., a real estate professional]. Instead, a rental real estate activity of a qualifying taxpayer [real estate professional] is a passive activity under Code Sec. 469 for the taxable year unless the taxpayer materially participates in the activity.

In addition, Reg. § 1.469-9(e)(3)(i) confirms that even taxpayers who establish real estate professional status must separately show material participation in rental activities (as opposed to other real estate activities) before claiming any rental losses as nonpassive.

In Perez, (2010) TC Memo 2010-232TC Memo 2010-232, a taxpayer argued that because she qualified as a real estate professional based on her job as a real estate loan agent and broker, and not solely by virtue of her ownership of rental real estate, she wasn’t required to pass the material participation test to claim her rental losses. The Tax Court rejected the taxpayer’s position and agreed with IRS that, based on Reg. § 1.469-9(e)(1)’s plain language, while the rental activities of a professional aren’t per se passive, they are subject to the regular material participation rules—which the taxpayer failed to satisfy.

Facts. During the 2006 and 2007 tax years, Charles and Delores Gragg, husband and wife, owned two real estate rental properties. Mr. Gragg was employed as a vice president of logistics, and Mrs. Gragg’s occupation was in real estate sales, i.e., a full-time licensed real estate agent. Their rental properties incurred losses for those years, and they deducted those losses from their taxable income on their joint return.

On audit, IRS disallowed the rental losses because it determined that the Graggs were required to show that they materially participated in their rental properties and had not done so.

The Graggs paid the deficiencies and filed refund claims with IRS for both years, which were denied. They sought relief in the district court.

District court decision. The district court granted IRS summary judgment in the refund suit, rejecting the taxpayers’ contention that Delores’s status as a real estate professional rendered their rental losses per se nonpassive. The court held that the tacxpayers weren’t excused by the wife’s Code Sec. 469(c)(7) real estate professional status from having to prove material participation in each real estate activity before deducting otherwise passive losses. This she failed to do, offering only noncontemporaneous “ballpark guesstimates” of time she spent on these activities. (Gragg v. U.S., (DC CA 3/31/2014) 113 AFTR 2d 2014-1647113 AFTR 2d 2014-1647)

The issue. On appeal, the issue was whether Code Sec. 469(c)(7) automatically renders a real estate professional’s rental losses nonpassive and deductible, or whether it merely removes Code Sec. 469(c)(2)’s per se bar on treating rental losses as passive. The Graggs argued for the former interpretation, and IRS argued for the latter.

Appellate court decision. The Ninth Circuit found that Code Sec. 469’s text, its regs, and the relevant case law all pointed to one conclusion: though taxpayers who qualify as real estate professionals are not subject to Code Sec. 469(c)(2)’s per se rule that rental losses are passive, they still must show material participation in rental activities before deducting rental losses.

The Court reasoned that the text of Code Sec. 469 favored IRS’s interpretation. The effect of the Code Sec. 469(c)(7) exception was merely that the per se bar didn’t apply. If the per se rental bar didn’t apply, the general rule under Code Sec. 469(c)(1) did, and the activity was passive unless the taxpayer materially participated. The regs (Reg. § 1.469-9(e)(1) and Reg. § 1.469-9(e)(3)(i)) supported this interpretation and couldn’t be reconciled with the Graggs’ understanding that the Code Sec. 469(c)(7) exception excused real estate professionals from the material participation requirement. While the Ninth Circuit had not previously addressed the Graggs’ interpretation of Code Sec. 469, the Tax Court—the opinions of which the Ninth Circuit viewed as persuasive authority—had squarely rejected the taxpayers’ argument in Perez.

The Court determined that Congress endeavored to narrow the scope of permissible deductions for passive losses in real estate investments, in part by requiring material participation before losses could be deducted. Real estate professionals were not exempted from this requirement.

Sep. 01.

First ppt presentation