The U.S. Cut Taxes. Why Will Fewer Folks Get…

U.S. taxpayers are filing their first returns under the 2017 tax code overhaul that lowered rates for most people. What makes the paperwork headaches tolerable for many is the promise of a tax refund at the finish line. Yet more taxpayers will end up with no refund, or a smaller one, compared with a year ago, before the lower rates fully took effect. How could that be? The explanation rests with the many other changes that made it into the revised tax code. Some Americans are venting their surprise and anger.

1. What were the other changes? The overhaul pushed through by Trump’s fellow Republicans in Congress did much more than lower rates for individuals and companies. It also eliminated some valuable tax breaks used by taxpayers to trim their bills, enhanced a tax credit bestowed on families with children and created brand-new benefits for certain taxpayers, such as business owners. Many people who live in high tax states, such as New York, New Jersey and California, will be able to write off only a fraction of what they pay in state and local taxes. Someone who travels frequently for work, but doesn’t have mileage covered, could owe more in taxes because there’s no longer a deduction for non-reimbursed business expenses.

2. Then why aren’t there lots more refunds? The Internal Revenue Service offers ongoing guidance to help employees and employers decide how much money to withhold from paychecks so that most income taxes are paid automatically and gradually throughout the year. The shifting tax brackets — they now start at 10 percent and top out at 37 percent for income about $500,000 — plus changes to exemptions, deductions and credits meant that many taxpayers needed to adjust their withholding. But most taxpayers were confused how to do so.

3. What’s the outlook for tax refunds? The IRS expects to issue 105.8 million refunds this year, down 2 percent from last year’s 108.3 million. According to Ernie Tedeschi, a former Treasury Department economist who analyzed the topic for research firm Evercore ISI, many taxpayers with incomes below $100,000 will get their tax cut in the form of a bigger refund, while those with higher incomes got the tax cut in the form of higher paychecks throughout 2018 — and therefore might be expecting refunds that aren’t coming. Analysts anticipate the total dollar amount refunded to be slightly higher, meaning some people will get bigger refunds than in the past. Among them are couples with children, since the standard deductions for filing as a couple, as well as the child tax credit, both almost doubled in the revised tax code.

4. Who won’t be getting a refund at all? More than 30 million Americans — 21 percent of taxpayers — didn’t have enough taken out of their paychecks throughout the year, meaning they will owe the IRS will they file their returns this year, according to a study from the Government Accountability Office. That’s an increase from 18 percent of taxpayers who were under-withheld last year. That means about 5 million people who got a refund last year won’t be getting one this year.

5. What does this mean for consumer spending? Despite fewer tax refunds overall, Wall Street analysts are expecting to see a boost in spending from the lower-income consumers who will benefit from the expansion of the child tax credit. Middle-income households, those earning from $55,000 to $75,000 a year, will also see benefits, with as much as half of their tax-cut bounty showing up in refunds, Wells Fargo said. The tax-cut sugar high could be short lived, however, the Congressional Budget Office said the effects of the tax cuts are set to wane in the coming quarters.

6. What are the political ramifications of this? Fewer people getting refunds will give U.S. Democrats, who now hold a majority in the House of Representatives, an opening to question how much the tax law benefited the middle class. Only about 45 percent of voters approve of the tax cut, according to recent polls, and many Republicans in high-tax states already lost their seats in the 2018 midterm elections due to the changes in the deductibility of state and local taxes. Looking ahead to the 2020 presidential election, dissatisfaction with the tax law gives Democrats an opening to promise tax changes of their own, ones that favor the middle class at the expense of the wealthy.

IRS Won’t Penalize Confused Taxpayers Following Changes to Code

Taxpayers who miscalculated how much they’ll owe the Internal Revenue Service this year won’t get hit with penalties — up to a certain point. The Treasury Department said Wednesday it won’t penalize individuals who underpaid their estimated taxes for 2018, as long as they paid 85 percent of what they owe through withholding or estimated quarterly payments. The 2017 tax overhaul changed the tax brackets, expanded the child tax credit and nearly doubled the standard deduction to $24,000 for a married couple — all changes that affect how much an individual will owe in taxes this year. This is the first filing season individuals are paying taxes under the new rules. Salaried workers have their taxes withheld from their paychecks. Business owners and self-employed people pay estimated taxes to the IRS quarterly. Those who still owe taxes will have to pay the IRS the additional tax they owe by April 15, the tax filing deadline, or file for a six-month extension. The announcement comes after the top Republican and Democrat on the Senate Finance Committee, Chuck Grassley and Ron Wyden, urged the agency to be lenient with penalties as taxpayers adapt to the changes stemming from the tax overhaul. Moments before Treasury’s announcement, Grassley took to the Senate floor to urge the IRS and Treasury to provide relief to taxpayers but to also include guardrails to prevent abuse. “The IRS should consider what action the agency can take to provide penalty relief,” Grassley said. “But the issue of under withholding due to the passage of tax reform should not be exaggerated.”

Expat Civilian Contractors in Combat Zones Beware !

It has come to our attention that many expatriate civilian contractors working in combat zones may be heading down a rabbit hole that may be riddled with snakes and IRS agents, if they claim to be bonafide residents, due to a gross misinterpretation of a change made to the Tax Code by the Tax Cut and Jobs Act of 2017As a result they could face a 25% accuracy related penalty COMBINED with loss of the Section 911 FEIE for 5 SUBSEQUENT YEARS. In order to qualify for the foreign earned income exclusion (FEIE), regardless of whether to bonafide residence or physical presence test is met, an American expatriate needs to establish that their “tax home” is in a foreign county.

In response to abuses of Section 911 (the foreign earned income exclusion (FEIE), in 1976 Congress amended the Tax Code by adding Section 911(d)(3) stating that the tax home of someone who’s “abode” was in the U.S.A. could not have a “tax home” in a foreign country. Neither the Code nor the Treasury Regulations defined the term “abode” which, until 2009, was not really an issue. The JCT had clarified that the legislative intent of the new provision was to prevent someone who commuted regularly between the job located in a foreign country and his/her residence in the U.S.A. Regularly means on a frequent, recurring basis. The example given was someone who lived with his family in Michigan but worked in Canada, and commuted regularly (say every weekend) to his “abode” in the U.S.A. Clearly such a person would never meet the physical presence test and was intended to target abuses regarding whether the person was a bonafide resident of Canada. The same was true where the Courts determined that where people had tried to say that they were bonafide residents of Japan because they only returned to their families every two months, where they stayed for a month before returning to work and live in Japan, that their true “abode” was in the United States where they returned regularly throughout the year. Accordingly , Tax Professionals (including CPAs and attorneys) were trained to identify such behavior patterns (especially where they were not taxed as residents by the local jurisdiction) and refused to sign a return that claimed the Bonafide Resident Foreign Tax Home exclusion.

Service Businesses That Qualify for the 20% QBI Deduction

One major provision of the law known as the Tax Cuts and Jobs Act (TCJA), is a new tax deduction for passthrough entities (S corporations, partnerships, and sole proprietorships). The deduction generally provides owners, shareholders, or partners a 20% deduction on their personal tax returns on their qualified business income (QBI). Various limitations apply based on the type of business operated and the amount of income the business has. Under the new rules, this deduction does not apply to certain enumerated SSTBs if the taxpayer’s taxable income is above certain threshold amounts. The threshold amounts are $315,000 for taxpayers filing jointly and $157,500 for all other taxpayers, with a deduction phaseout range, or limitation phase-in range, of $100,000 and $50,000, respectively, above these amounts. SSTBs are broken into two distinct categories: 1. Trades or businesses performing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of that trade or business is the reputation or skill of one or more of its employees, however, the TCJA specifically excluded engineering and architecture; or 2. Any trade or business that involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities. Before continuing this discussion, two points need to be made clear. First, if taxpayers are below the threshold amounts, they are eligible for the 20% deduction regardless of whether their business is an SSTB. Second, the SSTB classification applies to the business regardless of whether the taxpayer is actively or passively involved in it. To sum up the reputation and skill provision, it targets celebrities and public figures who make their living in the public eye. This was a welcome relief for many taxpayers, as it was uncertain how expansive this definition would be

IRS Will Need at Least a Year to Work…

Nina E. Olson, the National Taxpayer Advocate, said that the IRS will need a year or more to recover from the record-long government shutdown, noting all the work that went undone over those 35 days, according to the Washington Post. Speaking to congressional staffers, she said that the IRS has a backlog of 5 million unanswered correspondences, a swift doubling from the 2.5 million just two weeks ago. Beyond this, the shutdown also forced the IRS to delay training new employees, including 2,000 who were supposed to be able to answer taxpayer questions over the phone, and imperiled the agency’s IT plans, with the Post saying that the agency has lost about 25 IT tech staff per day since the shutdown began, many of whom simply left the IRS for other jobs. Further, plans to issue guidance and regulations on the Tax Cuts and Jobs Act provisions have also been delayed, and given all the other work to recover, now that the government has (for the time being) reopened, further issuance will likely be delayed. Overall, Olson believes that it will take between 12 to 18 months for the IRS to return to normal operations. This is assuming the government does not shut down again, which the White House has hinted at doing if future negotiations with Democrats go poorly.

However the government shutdown has had absolutely no affect on the IRS computers so please do not take this to mean that if the information on your tax return either does not match third party source documents, the Social Security database or other items that can trigger a tax return to be pulled, please do not assume that your will net get a letter from IRS as many of the tax adjustment letters are pre-programmed into the IRS computers and may never seem human intervention.