Just a reminder that the IRS has been clear in stating that crypto currency is akin to a financial investment or medium of exchange and therefore if a U.S. person has a foreign account or owns a controlling interest in the stock of a foreign company that holds crypto currency in any type of wallet or account, the rules pertaining to FBAR and FATCA reporting do apply and if a Form 114 or 8938 is required those accounts need to be reported and the value determined in US dollars must be determined and included.
The new Tax Cuts and Jobs Act, which is effective for years beginning after December 31, 2017, substantially limits Section 1031 Like Kind Exchanges by restricting it’s application to “real” property. Under the new tax law, by eliminating any type of “personal” property from the tax deferral provisions pertaining to exchanges of any “non currency” personal property of similar nature (such as art, rental income property including furniture and fixtures, farm animals such as dairy cows, etc.), exchanges of property that is not deemed “real” property, or real estate, must be valued at the time of the exchange and reported as a capital gain (either short or long term depending on the holding period). Although the U.S. Treasury Department needs to interpret the new law and promulgate regulations and the IRS needs to determine how it is enforced, the complexities are going to be substantial.
One example may affect the “swapping” of rental real estate between landlords or restaurants that include both the land, building as well as other business property. Whereas previously, the holder of one residential or commercial rental income property could enter into a Section 1031 like kind exchange and by following all the rules carry forward the cost basis of the transferred property for the acquired property, paying capital gains tax when the acquired property is actually sold for cash without identifying any personal property (such as furniture and fixtures that are not permanently affixed to the real property), there is a strong possibility that now the transaction will need to be appraised and those properties that are not defined as “real” but rather “personal” may need to be valued and reported as a currently taxable transaction. Although this would be a boom for the appraisers, it is an accounting nightmare that the T.D. and I.R.S. will need to address.
Traders in crypto currencies such as Bitcoins and the many other digital currencies will be affected as well. Although the IRS previously ruled that “cyber currency” is not true currency but rather “other” property, which enabled anyone who traded once digital currency for another without converting it into recognized national currency to defer any gain recognition until the digital “coins” were actually “sold” for dollars, Euro, Yen, etc. at which time capital gain tax would be payable if there is a gain. Under the new law, every time there is an exchange say of Bitcoins for Litecoins or Ethereum or Ripple, etc., the transaction needs to be valued in U.S. dollars and reported to the IRS. Depending on the number of transactions, the accounting could be a nightmare as a typical day trader in digital currency could conceivably exchange twenty different digital currencies in less than an hour. Unlike securities that are accounted for in like kind currency (i.e. shares of Exxon corporate stock on the NYSE which would be in U.S. Dollars or Nissan Motor Co., LTD on the Tokyo exchange in YEN, a trader in digital currency would need to carefully monitor each transaction and spend hours calculating the value of each transaction instead of tracking the dollars invested against dollars withdrawn from their digital wallet (or account).
A WORD TO THE WEARY: Given the high speculative risk involved, this could also spell big trouble for anyone who loses big and never returns to the market to generate future capital gains as the capital loss limitation remains at $3,000 while there is no way to carry the losses back to offset gains in prior years. Thus one could end up accumulating gains by virtue of exchanging digital currency, but when it came time to convert to cash, the value resulted in a cash loss.
While on the subject of digital currency, a reminder that any other transactions whereby goods or services are exchanged for crypto currency is deemed a taxable transaction and has been since 2014 (IR-2014-36, March. 25, 2014). Thus if you receive digital currency from your employer in exchange for your services, not only is the compensation subject to income tax, but also is subject to social security tax and other labor related contributions (i.e. unemployment tax, etc.).
W-2 electronically, have it posted on a website and notify the employee of the posting. For nonpayroll taxes, file Form 945 to report income tax withheld for 2017 on all non-payroll items, such as backup withholding and withholding on pensions, annuities, and IRAs. Deposit or pay any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.
The 2018 standard mileage rate for business driving will rise to 54.5 cents a mile, up 1 cent from 2017. Businesses with four or fewer vehicles can use this rate, but each vehicle’s basis must be reduced by the depreciation component…25 cents a mile.
The rate for medical travel and moving will go up 1 cent to 18 cents per mile. For now, the 2018 allowance for charitable driving will stay put at 14 cents a mile because it’s fixed by law, although there is a legislative proposal to annually adjust it.
You can also claim the cost of parking and tolls. But you can’t add the cost of fuel or repairs. Nor can you use these rates if you depreciated or expensed the car.
Attention businesses: Don’t forget your deadline for filing your Forms 1099 and Payroll reports is January 31, 2018. If you made payments to service providers or other mandated reporting persons, attorney’s, etc. please be certain that you have a signed Form W-9 on file for them now so that this information can be reported on the Form 1099. Lack of a reporting number will cause rejection and possible penalties and deny your deduction for the expenses.
Here is an email that I just received from NYS reminding payroll reporting:
Important Annual Payroll Tax Filing Reminder
The due date is January 31, 2018.
File your annual wage and withholding information (including other payments, such as pensions) timely and accurately.
If you use a payroll service or other preparer, give your annual wage and withholding information to them promptly and accurately. Before the due date, verify that they filed all required information on time.
You may face a penalty if you do not:
- provide your employee’s annual wage and withholding information, or
- file on time.
Visit our website and choose the filing method that works best for you.
Avoid common errors
Take measures to limit processing delays by avoiding common errors.
Respond quickly if contacted
If your annual wage and withholding information is not filed or contains errors, we may contact you. You must respond immediately with the required information.
- Visit our website at www.tax.ny.gov (search: TR-150.5)
The Tax Department will never send you an email asking you to validate personal information such as your username, password, or account numbers
The new tax will add approximately $1.5 trillion to the national deficit. Most of the tax benefits will go to businesses by lowing the corporate tax rate on corporations (while keeping the double taxation aspect of taxing distributions of previously taxed corporate income to shareholders), lowering income tax rates on pass trough entities such as partnerships and S corporations and moving U.S. international business toward what is known as a territorial scheme of taxation whereby earnings of American owned foreign corporations would no longer be taxed and no longer subject to the complexities of international Subpart F rules. The cost would be partially offset by limitations or eliminations of our precious home ownership deductions (significantly hurting middle class earners residing in relatively high cost of living areas such as parts of California, N.J. and NYS (i.e. Putnam County) where the average cost of living has not increased for most people while state and local income and home real estate and school taxes easily eat up 20% of their disposable net income, as well as other deductions and credits.
Congress has passed the most sweeping overhaul of the federal tax code in three decades. The Republican legislation, which President Trump celebrated on Wednesday, delivers most of its benefits to corporations and the wealthy, but there are key changes that affect individuals.
Unlike the corporate tax cuts, the revisions to the individual code are temporary and expire in 2026. Most of them kick in on Jan. 1, and there are steps you could take in the coming days to maximize new advantages and minimize the potential hit from other changes.
| PAY YOUR PROPERTY TAXES EARLY
The legislation sets limits on the amount of state and local taxes that people can deduct. Beginning in 2018, couples filing jointly will be limited to an annual deduction of no more than $10,000 worth of state and local income, sales and property taxes.
Right now, there is no limit on the deduction and the change will be a hard hit to many residents of California and other high-tax states.
Property tax bills generally go out in the fall, with half the taxes due by early December and the other half due by April. If your state and local taxes will be greater than $10,000, you could pay the second installment bill before the end of this year and should still be able to deduct it on your 2017 taxes when you file in the spring, if you itemize.
The legislation doesn’t specifically rule out such a move. But it does prohibit people from pre-paying 2018 state or local income taxes this year and claiming them as an itemized deduction for 2017.
“The bill is pretty clear that you will not be able to prepay, even if you could, your income taxes,” said Darien Shanske, a tax law expert at the UC Davis School of Law. “But it’s silent about property taxes.”
Pre-paying property taxes might not be possible if your mortgage servicer pays them for you from an escrow account. People should contact their servicer.
|MAKE AN EXTRA MORTGAGE PAYMENT
The tax overhaul will nearly double the standard deductions for taxpayers who don’t itemize, from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for couples.
The change is expected to dramatically reduce the number of filers who itemize because fewer people will have total deductions above the new levels.
Given that, taxpayers who anticipate itemizing on their 2017 returns might want to consider making their January mortgage payment before the end of the year.
Doing so would allow you to deduct an extra month of mortgage interest that you might not be able to deduct on your 2018 return if you don’t end up itemizing because of the higher standard deduction.
The tax bill also limits the deduction to interest on as much as $750,000 in mortgage debt, down from the current $1-million limit. People who already own homes still get the higher limit.
But lawmakers added a provision to prevent people from a last-minute scramble to buy homes before the limit goes into effect next year.
Unlike most of the bill’s changes, which take effect on Jan. 1, a taxpayer must have entered into a binding written contract before last Friday to be eligible for the $1-million limit.
| GIVE MORE TO CHARITY
Charitable contributions are one of the most popular deductions. But the number of people who itemize is expected to fall sharply. If you think you’ll stop itemizing, you might want to consider making your 2018 contributions by Dec. 31 so you would be able to deduct what you give to charity.
“This might be the year, if they can no longer itemize their charitable donations, to clean out the closet and donate to Goodwill or the Salvation Army or make that extra contribution to your church,” said Kathy Pickering, executive director of the Tax Institute at H&R Block, which provides research and analysis to the company’s tax preparers.
As with an extra mortgage payment, the move makes tax sense only for people who believe they will have enough deductions to itemize on their 2017 return but not when they file 2018 taxes, said Robert Spielman, a partner at Marcum, an independent public accounting and advisory services firm.
The key is estimating your chances of having deductions in 2018 that exceed the new standard deduction level.
If you’re not going to exceed that, maybe you arrange with your parish and prepay your 2018 pledge in 2017.
| DEFER OR ACCELERATE INCOME
Individual marginal tax rates are shifting lower, so you’ll generally pay less taxes on the same amount of earnings in 2018 compared with 2017.
People who are self-employed, such as contract workers or freelancers, should consider holding off on sending invoices so the payments come in 2018.
For most people, their federal tax bracket is going to be lower under the tax bill, so it would make sense to defer.
Depending on the size of your family, however, you might not want to make that move. Instead, it might make sense to accelerate any possible income into this year when you might owe less taxes.
The tax bill eliminates the existing $4,050 exemption that can be claimed by taxpayers for themselves, their spouses and their dependents and also reduces taxable income. Those exemptions currently phase out at upper-income levels.
Some of that change is offset by the legislation’s doubling of the child tax credit to $2,000 and making it applicable to higher-income households, as well as adding a $500 family tax credit for dependents other than children.
It all means that some people might have more offsetting family-related deductions this year.
If you have a big family, three or more kids, it might make sense to accelerate the income into this year before the tax bill takes effect next year.
|TAKE ADVANTAGE OF EXPIRING DEDUCTIONS
Under current law, employees are allowed to deduct unreimbursed business expenses if they total more than 2% of their adjusted gross income.
They include a home office, depreciation on a personal computer required for the job, dues to professional societies and subscriptions to journals and trade magazines.
All of those deductions would disappear through 2025 under the Republican tax bill, so you probably want to move as many of those expenses as you can to this year, such as by re-upping professional journal subscriptions.
A key to tax planning is figuring out which deductions to take in one year and which to postpone until the next.
This year’s a little different because we have a lot of deductions going away.
Have you failed to timely file a complete foreign information report such as Forms 5471, 5472, 114, 8938, 3520, 8865 or any of the other forms? If you are not sure what these forms are but you are either a foreign owner in a U.S. business entity or American owner of a foreign business entity or own foreign financial accounts or other specified foreign assets either directly or indirectly through ownership in foreign entities or persons you are probably delinquent. Even if you were not an owner but merely had signing authority with the ability to control monetary transfers of funds in foreign accounts, or a Director or officer of a foreign corporation that was deemed a Controlled Foreign Corporation (or other entity), or if you are the beneficiary of a foreign trust or estate you have information return responsibilities. The bad news is that the IRS or U.S. Treasury Department will assess a non filing or incomplete filing penalty of $10,000 for each and every form and for every year of delinquency once they find out, and with the new information sharing programs between the U.S. and other countries in effect, it is not about if they find out, but more of a matter of when..and there is no statute of limitation to protect you.
The good news is there are government programs available that can help you get caught up with past due income tax returns and foreign information reports and if there is no unreported or unpaid U.S. income tax bringing your tax matters current could be relatively painless if you act now the bring yourself into compliance before the IRS sends you a Notice of Penalty Charge CP215.
The House and Senate tax bills are a lot alike. Both plans have similar big-picture themes:
Reduce individual rates, pare back some write-offs, slash the corporate rate to 20%, give tax preferences to individual owners of pass-through businesses and move to a territorial tax regime for multinationals.
However, there are also marked differences. We’ll delve into a few of the major ones. The Senate wants temporary individual cuts. This includes lower rates, higher standard deductions and child credit, repeal of the alternative minimum tax, breaks for self-employed persons and owners of pass-through firms, estate tax changes.
The House plan has four individual tax rates, ranging from 12% to 39.6%. The Senate proposes seven rates, starting at 10% and topping out at 38.5%. It’s a close call, but it wouldn’t surprise us to see fewer rates than under current law.
There’s huge disagreement over the popular state and local tax write-off. The Senate wants to fully ax it, while the House has come up with a compromise: End income tax write-offs and cap the deduction for real property taxes at $10,000. We think the Senate will cave when both chambers iron out their differences.
Other itemizations are also in dispute: The home mortgage interest write-off. The House would nix the break for second homes and lower the $1-million ceiling on home acquisition indebtedness to $500,000. These proposals aren’t included in the Senate bill, but there’s a chance they could make it into any final tax legislation.
The write-off for medical costs. The House would do away with this break. The Senate would keep it. We continue to think this deduction will survive in the end.
Turn to the estate tax. The House wants to double the lifetime exemption until 2025, when it would then fully repeal the tax. The Senate would preserve the tax but double the lifetime exemption. Look for the Senate proposal to prevail here.
The treatment of owners of pass-through firms is in flux. The House bill applies a 25% top rate to a portion of a person’s share of income from proprietorships, LLCs, S corporations and partnerships. The Senate calls for a new 17.4% deduction for pass-through income. Both versions contain lots of limitations and anti-abuse rules that have drawn the ire of powerful lobbying groups and at least one GOP senator. We anticipate that these provisions will be substantially revised in any tax package.
After 15 years our old site, built on the Microsoft Front Page Platform, has finally died. We are now in the process of building a new site that we hope that you will find cleaner and easier to use.
The download our most recent tax organizer can now be found on our home page under Individual Income Tax Return Preparation. As before, you will need Adobe PDF to read it.
This new tax law being enacted makes it of critical importance that you review your personal and business tax situation to determine what, if anything, is required by year end in order to maximize deductions or minimize tax on income.
You can contact me if you need assistance prior to year end and we will do our best to summarize those new laws that will impact our clients both domestic and international.