Capital Gain Tax Deferral/Reduction: New Opportunity Zone Investment Program

IRS’s opportunity zone program is under way. It allows taxpayers to defer capital gains from the sale of business or personal property by investing the proceeds in opportunity funds to help development of low-income communities. This incentive was enacted under the new tax law, and many expect the program to be very popular. 

New IRS guidance provides helpful rules. The proposed regulations, which clarify definitions and address some open questions and uncertainties, are a welcome relief for investors, fund managers and others awaiting guidance before actively moving forward with the new regime. 

All sorts of taxpayers are eligible to participate: Individuals, C corporations, partnerships, S corporations, LLCs, real estate investment trusts, estates and more. To take advantage of the tax break, the gains must be invested in a QOF… qualified opportunity fund. A QOF is an entity that’s formed for the purpose of investing in qualified opportunity zone property and that holds at least 90% of its assets in such property. An entity Self-certifies as a QOF each year by attaching Form 8996 to its tax return. IRS’s regs provide more details on the rules to become a QOF. You have 180 days from the sale date to invest the gain proceeds in a QOF. You can invest all of your short or long-term capital gain proceeds from the sale or exchange of assets to an unrelated party in a QOF…or just part of the gains. Only the portion of the gains contributed to the QOF qualifies for deferral. 

Taxpayers who opt to use this break must elect deferral on Form 8949, which they would file with their federal return for the year the capital gain is realized. In the case of pass-through entities such as partnerships, LLCs and S corporations, the election to defer capital gains may be made by either the entity or an owner. If the owner opts for deferral, then the 180-day period for investing gains in a QOF begins on the last day of the pass-through firm’s tax year in which the gain is realized. 

Let’s turn to the main tax benefits from investing capital gains in a QOF: the gains are deferred until Dec. 31, 2026, or sales of the QOF, if earlier. Tax would generally be owed at that time on the deferral gains less the tax basis in the QOF Investment. There’s no limit on the amount of gains that can be deferred. The longer one holds a QOF investment, the more tax incentives there are. The investor begins with a zero-tax basis. If the QOF is held for at least five years, then the basis increases by 10% of the originally deferred gain, which essentially means that 10% of the deferred gain could gain could go permanently untaxed. If held at least seven years, then the tax basis is further increased by 5% of the gain that was originally deferred. And if the QOF interest is held for 10 or more years, taxpayers can elect to hike basis to fair market value at the time of sale, so that post-acquisition appreciation in the QOF isn’t taxed when the interest is sold.

Just Some of the 2018 Income Tax Changes

Recently a client asked if she could prepay her home property tax bill to deduct it in 2018. I think that you will find my response somewhat shocking:

The IRS will allow a deduction provided that you received a bill from the assessor. Contact the assessor to see if they will bill you now so that you can pay before year end assuming that will help your deduction. However keep in mind that the $10,000 state and local tax limitation includes all S&L taxes including income tax as well as property tax assessments. Accordingly if your state income tax paid in 2018 was $5,000 (hypothetically) then only $5,000 of property tax paid is deductible. Again, there must be a liability supported by a tax assessor’s bill in the case of property or an income tax return in the case of state income tax (which is why state income tax refunds are deemed taxable income provided that the excess was deducted in the previous year <the tax benefit rule>).  

The other thing to keep in mind is that several other deductions were affected by the new tax law including the fact that the deduction for business and other miscellaneous expenses as well as job hunting and employment related moving and casualty losses are no longer deductible. The only itemized deductions that remain are medical (to the extent they exceed 7.5% of adjusted gross income for 2018 and 10% for 2019-2025), a maximum of combined state and local taxes paid (limited to the extent that there is a liability) and charitable donations. The standard deduction for persons who are married filing jointly is increased to $24,000 however the new law repealed the deduction for personal exemptions.  

If you know anyone who pays alimony to a former spouse this deduction is eliminated but only for divorce alimony agreements executed or modified after December 31, 2018. Similarly recipients of alimony for agreements executed or modified after December 31, 2018 no longer include it in taxable income. For those agreements that were in place previous to January 1, 2019 payments are deductible without limitation by the payer and taxable income by the recipient.  

Even worse (regarding the cost of employment related relocation) is tax if an employer either pays the relocation vendor (moving company, airline, etc.) directly OR reimburses the employee for the cost, the amount paid by the employer is not only included as wages subject to income tax (and tax withholding) but social security and Medicare tax as well. So not only will employees suffer economically by paying income AND social security tax on the expense reimbursement, this will create problems for people who changed jobs, it will force employers to gross up the amount paid to the employee so they are tax neutral OR opt to hire local nationals instead of relocating American employees.

Aren’t you happy that you asked for a brief lesson in the new tax law?

More tax changes-Employment related business and relocation costs

Some examples of employee business, including moving, and other income producing expenses you can no longer deduct defy logic and may cost you mucho megabucks. Let’s discuss some tax changes that were enacted at warp speed late last year.

Can I deduct investment fees I pay this year? 

No. The Schedule A write-off for these costs, IRA custodial fees paid directly by the account owner, and the rest of the popular miscellaneous deductions subject to the 2%-of-AGI threshold are now gone.

My employer paid for my cross-country move. Is the amount taxable to me?

Generally, yes. It used to be that when you relocated for a new job, you could deduct moving costs, or if your employer reimbursed you, the payment was tax-free. Well, not anymore, except for active-duty military personnel who move pursuant to military orders.

Is the new opportunity zone program up and running yet?

In part. This program, which is included in the new tax law, lets taxpayers defer capital gains from the sale or exchange of business or personal property, including stocks, by investing the proceeds in opportunity funds to help low-income communities. Those who opt to take advantage of this break have 180 days from the date of the sale to invest all or part of the gain proceeds in a so-called qualified opportunity fund. IRS is set to release proposed regulations on how this tax break will work. An open question is whether gain deferral will automatically end in 2026, when the break is set to expire. Tax and investment advisers hope the guidance will address this concern plus provide clarity on key definitions and other issues.

Is Schedule E rental income eligible for the 20% pass-through deduction?

It depends on whether the activity rises to the level of a trade or business. The new tax break applies to qualified business income from a trade or business. In proposed rules, IRS refers to the standard under the federal tax code that generally govern the deductibility of trade or business expenses.  Unfortunately, this standard is unclear in the context of a rental activity. That’s because it’s based on facts and circumstances that are specific to each taxpayer, and the issue hasn’t been resolved by case law. Some aspects considered important: Type of property that is leased, extent of day-to-day involvement by the lessor or the lessor’s agents, number of properties rented and specific terms of the lease. Tax pros and others are pleading with IRS to address this in final regulations. If the agency does not, then it will be up to the courts to resolve it later.

Will Congress make permanent the individual tax provisions in the new law?

Not this year. Most off the changes affecting individuals and small businesses expire after 2025. House Republicans will act on a bill to make the changes permanent. But the effort will die in the Senate. This won’s stop GOPers from touting tax cuts, which some see as a campaign message to entice voters in the midterm elections. 

2018 Itemized Deductions Changed

IRS released a draft of the 2018 Schedule A. It reflects the changes to itemized deductions that were enacted under last year’s tax reform law. Note that because of the higher standard deductions, far few filers will itemize in 2018 than in the past years. 

Start with medicals. The AGI threshold for deducting 2018 medical expenses stays at 7.5%. It goes back up to 10% for all filers beginning in 2019. 

Turn to state and local taxes. This write-off is now capped at $10,000 for Schedule A itemizers…$5,000 for couples filing separately. Note that property and sales taxes remain fully deductible for taxpayers in a business or for-profit activity. So, property taxes paid on rental realty can be taken on Schedule E without regard to the cap, and self-employeds and farmers can deduct on Schedule C or F property taxes and sales taxes paid in their business. 

Interest on home mortgages in nicked. Interest can be deducted on Schedule A on up to $750,000 of acquisition debt on a primary and a secondary residence…down from $1 million. This new limit generally applies to home mortgage debt incurred after December 14, 2017. Older loans and refinancing’s up to the old loan amount get the $1 million cap. No write-off is allowed after 2017 for interest that you pay on existing or new home equity loans from which the proceeds are used to buy a car, pay down credit card debt, etc. The law’s crackdown on home equity loans doesn’t apply to debt secured by a first or second home and used to remodel or improve the place.    

Interest on margin loans can still be written off. Investment interest paid is deductible on Schedule A up to the amount of net investment income reported. 

The charitable contribution write-off is preserved, with a couple of changes. The AGI limitation on cash donations to qualified charities is hiked from 50% to 60%. Also, gifts to colleges in exchange for the right to buy choice seats at sporting events aren’t as valuable taxwise. Under old law, donors were able to deduct 80% of the gift, even when the value of the seat license they received in exchange for their donation exceeded 20% of the donation. Congress eliminated this break in the new tax law. 

The deduction for personal casualty and theft losses is a thing of the past…Except for casualty losses incurred in presidentially declared disaster areas.  

All deductions that were subject to the 2%-of-AGI threshold are gone. These include unreimbursed employee business expenses, tax preparation costs, investment account management fees, IRA custodial fees paid by the account owner, hobby expenses to the extent of hobby income, safe deposit box fees and many more. 

But other miscellaneous write-offs survive, such as personal gambling losses to the extent of gambling winnings that are reported on the first page of the 1040. Note that years ago you could offset gambling losses directly fro gambling winnings on Line 28 of Form 1040, regardless of whether or not you itemized deductions. I think it is totally unfair and discriminatory to restrict this deduction only to people who itemized their deduction. Now, more than ever, with more people claiming the standard deduction, it will forced those who occasionally win from lottery tickets, casinos, racetracks, etc. to pay tax on the winnings regardless if their losses was greater than their winnings. I had a situation years ago where an elderly client who rarely gambled and did not have itemized deductions that were sufficient to claim more than the allowable standard deduction, ended up paying income tax on her winning lottery ticket without the benefit of reducing it by her losing tickets.

 The phaseout of itemized deductions for upper-incomers is scrapped.

New 2018 Tax Law Questions

Questions continue to pour in. Not surprisingly, most are on the new tax law. Now that the individual tax filing deadline has passed, people are starting to focus on their taxes for 2018. We’ll share some inquiries and our answers.

• Can I still deduct IRA custodial fees?
• No. The write-off for Schedule A miscellaneous deductions is gone, beginning with 2018 returns filed next year. These include investment account management fees, tax preparation fees and unreimbursed employee costs.
• I recently left my full-time job, and I’m now an independent freelance writer. Can I claim the new 20% deduction for pass-through income?
• Generally, Yes. It applies not only to individual owners of pass-through entities such as partnerships and LLCs, but also to self-employed individuals who file Schedule C with their returns. An important limitation applies to high earners in certain service fields. They include health, law, accounting, consulting, financial and brokerage services, performing arts, athletics, actuarial science, investing or trading in securities, or any business where the principal asset is the reputation or skill of its employees. If you’re in one of the affected fields and your total taxable income exceeds $315,000 for joint returns and $157,500 for all others, the 20% deduction begins to phase out. It’s zero once your taxable income exceeds $415,000 for couples…$207,500 for others.

• Did the new law end the deferral of 100% of gain through like-kind swaps?
• No. It survives, but only for exchanges of real estate not held primarily for sale. So, when investment or business real estate is exchanged for similar real property, any gain that would otherwise be triggered if the property was sold can be deferred. Prior to 2018, this break also applied to like-kind swaps of personal property such as heavy equipment, machinery, computers, railroad cars and airplanes.

• I converted a traditional IRA to a Roth IRA last year, and it has lost money. Do I still have to undo the switch?
• Yes, you have until Oct. 15, 2018, to eliminate the tax bill by transferring the converted funds back to a traditional IRA. This is called a recharacterization. If you’ve already filed your 2017 return and paid tax on the conversion, you can file an amended return on Form 1040-X to seek a refund. Roth conversions done after 2017 are irreversible. You still have the ability to convert your traditional IRA to a Roth, but you won’t be able to undo it later.

• I’m thinking of adding solar panels to my home. Can I still get a tax break?

Yes, you can claim a credit for 30% of the total cost. For solar energy systems installed in a residence, the full credit applies through 2019 and then phases out… 26% for 2020 and 22% for 2021…until it ends after 2021. Ditto for the breaks for geothermal heat pumps, residential wind turbines and fuel cell property. What if I put in energy-efficient windows or doors? You’re out of luck, for now. The limited tax credit for these residential energy-saving items lapsed after 2017.

Don’t Miss Out on New Small Business Deductions

Big business entities, including multinational corporations, are expected to reap the main tax rewards under the TCJA. But the new law doesn’t ignore small businesses. Beginning in 2018, it provides plenty of tax-saving opportunities for small business owners, although you’ll also face some tax obstacles. Unlike the tax provisions for individuals, most business-related provision in the TCJA are permanent. Here are 5 key tax changes that deserve your immediate attention.

1. Pounce on lower tax rates. Prior to the new law, corporations were taxed under a graduated tax-rate structure with a top rate of 35%. The new law replaces this rate structure with a flat rate of 21%. Thus, the effective tax rate for the majority of C corporations is lowered.

Tip: The TCJA also reduces the dividends-received deduction from 80% to 65% if a corporation owns 20% of the stock of another corporation (from 70% to 50% for other).

2. Max out on Section 179. The TCJA almost doubles the maximum Section 179 expensing allowance from $510,000 for tax years beginning in 2017 to $1 million for 2018 and increases the deduction phase out threshold from $2.03 million for tax years beginning in 2017 to $2.5 million for 2018. Thus, many small businesses can currently deduct the entire cost of qualified property placed in service in 2018. The deduction is still limited to your income from business activities.
3. Seize bonus depreciation. For the next five years, your business can claim 100% bonus depreciation, up from 50% in 2017, for qualified business property placed in service. After 2022, the deduction is reduced incrementally, as shown below, before it disappears completely after 2026. Qualified business property is expanded to include used, not just new, property.
4. Ride in tax luxury. Depreciation deductions for so-called “Luxury cars” for business drivers are limited to relatively modest amounts. However, under the law, the annual limits for luxury cars are boosted. For example, if you acquire a used business car in 2018, the maximum first-year deduction for 100% business use is $10,000. (It was $3,160 in 2017.)

Tip: A business car may also be eligible for bonus depreciation of $8,000.

5. Pass through a deduction. For the first time ever, the owners of many pass-through entities such as partnerships, S corporations, limited liability companies and sole proprietorship can deduct 20% of net business income on the personal returns. In effect, you’re only taxed on 80% of your small business income. But this provision includes restrictions against gaming the system. Notably, the deduction is phased out for owners of most service businesses, other than architects and engineers. Everyone else from photographers to plumbers is covered. However this restriction doesn’t apply to single filers with taxable income up to $157,500 and up to $315,000 for joint filers.

NYS Dept. Labor Penalizes Small Business if Income Insufficient…

NYS SINGLE OWNER SUBCHAPTER S SMALL BUSINESSES PENALIZED IF OWNER UNABLE TO DRAW SALARY DUE TO CHRONIC ILLNESS OR INSUFFICIENT SALES-UNEMPLOYMENT RATE RAISED TO THAT OF A START UP BUSINESS EVEN WHEN FOR MANY YEARS THERE WERE NO UNEMPLOYMENT CLAIMS.

I recently bore witness to a situation where an 84 year old man, chronically ill with heart disease, cancer and diabetes struggled to keep his small business open (as that was what kept him alive) and barely met the expense of his rent and overhead, was unable to pay himself a salary for 12 consecutive months as there was not enough income. After receiving a notice requesting an explanation for not paying remuneration and explaining that he was ill, NYS Department of Labor increased his Unemployment Contribution rate from 1.225 to 3.425, an increase of 2.2%…even though in all the years that he was in business and healthy that no unemployment claims were ever made against his experience rating. So you have to love New York when they penalize an old man for trying to hold on to the only thing that kept him going, which was his business.

So as his health began to BARELY improve the $1,200 that he paid himself in the next quarter (3 months) cost him $41 instead of $14. That may not seem like a lot to most but to an old man living on sub poverty income, that is the cost of two meals.

Foreign Bank Account government exchange program

When it comes to the U.S. and for example Switzerland, there are two FATCA model types.

Model 1, chosen by most European countries, is based on the principle of automatic exchange of information. Financial institutions provide details of all capital subject to US tax to their local authorities, who pass these details on to the IRS.

Switzerland opted for Model 2, according to which Washington is supplied with information directly by the financial institutions – but this only concerns capital held by American customers who consent to their details being released.

For customers who do not consent to this, the financial institutions must tell the IRS the number and the total value of these accounts. The IRS can then put in a request for “administrative assistance” to the Swiss government to get the full details.

The IRS is withdrawing their voluntary compliance initiative this year and anyone who has not filed and reported their foreign financial assets is in for a big surprise. But this is not only Americans and the IRS. Many countries now have their own version of FATCA and in exchange for cooperating with the IRS regarding their American owned bank accounts the IRS is reporting to them information concerning their national individuals and entities that own financial assets here in the U.S.A.

Errors in New Tax Law That Need to be…

The new tax law was enacted at warp speed. President Trump signed the legislation on December 22, 50 days after a bill was first introduced in the House. So, it’s no surprise that it’s full of slipups, snafus and drafting mistakes unintended by tax writers.

Congressional GOP members want to fix the errors by passing what are called technical corrections. But Democrats may not be keen to go along. They’re loath to give Trump another legislative victory when it comes to tax changes. Also, Republicans can’t use the same budget reconciliation procedures to bypass the 60-vote requirement in the Senate that they used to pass the package. 

 That doesn’t mean Republicans won’t try. Staff members are drafting language with the hope that they can attach it to this month’s spending bill or another vehicle in order to rally some Democratic votes. Chances of success are uncertain at this time. 

Mistakes in the law.

Let’s start with depreciation for restaurant, retail and leasehold remodeling. It’s now consolidated under the grouping of qualified improvement property (QIP). Congressional Republicans intended to give QIP a 15-year depreciable life and to make it eligible for 100% bonus depreciation. But the new statutory language doesn’t’ reflect this intent, accidentally making QIP ineligible for bonus depreciation.

The rule barring net operating loss carrybacks contains an oversight. The statutory language says that the general prohibition on NOL carrybacks applies to NOLs arising in tax years ending after December 31, 2017, while the conference committee used an effective date for NOLs arising in years beginning after December 31, 2017. The law as currently written allows calendar-year filers to carry back 2017 losses, but fiscal-year taxpayers with 2017 losses are prohibited from doing the same.

There’s a big loophole in the tax treatment of hedge fund managers. The new law requires fund managers who take a share of partnership profits as compensation for services to hold their partnership interest for at least three years for the profits to be long-term capital gains. The law exempts partnership interests held by corporations, and fund managers say that includes S corporations. However, the Revenue Service recently announced that it will issue regulations to clarify that the exemption applies only to C corporations. Some tax advisers question whether IRS has overstepped, saying that only Congress can fix this.

As I predicted, this hurried tax legislation was not unlike the Tax Reform Act of 1976 that resulted in The Technical Corrections Act of 1977 to fix the errors in the domestic tax issues and an entire new legislation enacted in 1978 called the Foreign Earned Income Act of 1978 which also failed to address or foresee future misinterpretations and abuses both by the IRS and unscrupulous taxpayers.

Tax Court Determines Some Civilian Contractors Can Claim Foreign…

Filed September 18, 2017, the Tax Court ruled in Linde V. Commissioner, TCM 2017-180, that determination as to whether or not the Tax Home of an American civilian contractor working for the DoD for other than limited durations, is deemed to be in a foreign country for purposes of qualifying to exclude income pursuant to Internal Revenue Code Section 911 if they qualify under the “physical presence test”. Without going into the details of the case in this posting, Americans who resided outside the United States and met the 330/365 day PP test may be able to claim the foreign earned income exclusion, even if they worked in countries such as Iraq or Afghanistan. For those who have otherwise qualified for the exclusion but filed without claiming it (care must be taken as to whether or not it is deemed that the taxpayer chose to “opt out” of the exclusion or if their return was recently audited or presently being audited by the IRS, they need to revisit their open tax returns to see if they meet the criteria of this Tax Court decision.

In TCM 2017-180 the judge ruled that in determining whether or not the taxpayer’s “abode” is in the United States, all facts and circumstances need to be scrutinized. According to Judge Vasquez, “Considering the unique facts and circumstances of this case, including Mr. Linde’s continuous employment in Iraq up to the date of trial, we find that Mr. Linde’s ties to Iraq were stronger than his ties to the United States during the years in issue. We therefore hold that Mr. Linde’s abode was not in the United States and that his tax home was in Iraq”

IRS to end offshore voluntary disclosure program; Taxpayers with…

IR-2018-52, March 13, 2018

WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017.

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.

Tax Enforcement

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”

Streamlined Procedures and Other Options

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets.  Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:

• IRS-Criminal Investigation Voluntary Disclosure Program;
• Streamlined Filing Compliance Procedures;
• Delinquent FBAR submission procedures; and
• Delinquent international information return submission procedures.

Full details of the options available for U.S. taxpayers with undisclosed foreign financial assets can be found on IRS.gov.

Winter storm extension: Many businesses have extra time to…

IR-2018-50, March 13, 2018

WASHINGTON — The Internal Revenue Service today granted many businesses affected by severe winter storms additional time to request a six-month extension to file their 2017 federal income tax returns.

The IRS is providing this relief to victims and tax professionals affected by last week’s storm–known as Winter Storm Quinn—and this week’s storm –known as Winter Storm Skylar–that primarily hit portions of the Northeast and Mid-Atlantic.

Business taxpayers who are unable to file their return by the regular due date—Thursday, March 15, 2018–can request an automatic extension by filing Form 7004, on or before Tuesday, March 20, 2018.  Form 7004,  available on IRS.gov, provides a six-month extension for returns filed by partnerships (Forms 1065 and 1065-B) and S corporations (Form 1120S).

Eligible taxpayers taking advantage of this relief should write, “Winter Storm Quinn” or “Winter Storm Skylar,” on their Form 7004 extension request (if filing this form on paper).  As always, the fastest and easiest way to get an extension is to file this form electronically.

The IRS will continue to monitor conditions and provide additional relief if circumstances warrant.

Your 2018 Health Plan Must Comply With ACA Rules…

February 27, 2018 By Michelle Andrews from Keiser Health News

Health plans that don’t meet the standards of the Affordable Care Act; work requirements for Medicaid coverage; changes to Medicare’s approved drug lists: As the ground continues to shift on health care coverage, I’m answering readers’ queries this week about these three different types of plans:

I lost my job last year and my employer coverage ended in January. I bought a new plan through the marketplace that went into effect last month. I just received policy information, and it states that because the plan does not cover major medical services, I may have to pay additional taxes to the government. I was told that the plan didn’t cover major medical, but wasn’t told about any taxes. Will I be fined next year?

It sounds like you bought a plan that doesn’t comply with the Affordable Care Act’s requirements, and if that’s the case you may indeed have to pay a penalty for not having comprehensive coverage when you file your taxes next year.

The tax reform law repealed the individual penalty for not having health insurance, but that provision doesn’t take effect until 2019. So, for 2018, you may be charged the greater of $695 or 2.5 percent of your household income.

The federal- and state-run marketplaces established by the ACA sell only comprehensive plans that cover 10 essential health benefits, including “major medical” services like hospitalization and prescription drugs.

But some insurance broker websites call themselves marketplaces too, says Sabrina Corlette, a research professor at Georgetown University’s Center on Health Insurance Reforms. And that can be confusing. These companies may sell other insurance products — like short-term or accident coverage — alongside comprehensive plans that comply with the law.

Ever since the health law was passed, “There have been opportunistic companies trying to take advantage of consumer confusion to make money,” Corlette says.

If you aren’t happy with your plan, you may still be able to switch. Losing your employer coverage qualifies you for a 60-day special enrollment period to pick a new plan. Since it appears you’re still in that window, you may be able to choose a comprehensive plan.

To ensure you’re using your state’s official marketplace, go to healthcare.gov and click on “see if I can change.” That will take you to your state marketplace, even if you live in one of the dozen or so states that run their own exchanges.

I’m in a state that is looking into work requirements for Medicaid. At sign-up time, can I simply tell the exchange that I intend to be ineligible for Medicaid by refusing to work and get the premium tax credit to buy a private plan on the insurance marketplace?

Federal health law regulations don’t clearly address the situation you describe, but the short answer is probably not, according to policy analysts.

In general, people who are eligible for employer coverage or Medicaid — the federal-state health program for people with little income — can’t qualify for federal tax credits that help pay for premiums on plans sold on the health insurance exchanges.

This year, Kentucky and Indiana became the first states to receive federal approval to require some Medicaid recipients to put in 80 hours each month at a paid job, school or volunteer work (among other activities), to receive benefits. Nearly a dozen other states have made similar requests.

States might argue that someone in your situation is eligible for Medicaid — you just have to fulfill the work requirements, says Timothy Jost, an emeritus professor of law at Washington and Lee University in Virginia, who is an expert on the health law.

There are other actions people could take — or fail to take — where this issue might come up. “You could argue that someone is not eligible because they haven’t completed the Medicaid application or provided the required documentation,” Jost says. “There are any number of requirements, but I can’t imagine someone saying they didn’t do those things and so they’re not eligible for Medicaid.”

Whatever the rules, it’s unlikely that many people will be in a position to consider taking this stance. To qualify for premium tax credits, your income must be between 100 and 400 percent of the federal poverty level (about $12,000 to $48,500 for an individual in 2018). But you’d also have to be eligible for Medicaid, generally with an income limit of 138 percent of poverty (about $16,750) in states that expanded coverage to adults. In addition, the Medicaid work requirements in your state would have to apply to you.

I picked a Medicare Part D drug plan that covered all the drugs I take. But as soon as I got my first Novolin R prescription filled, they notified me that they don’t cover it anymore. Can they just switch it like that?

Medicare drug plans can change their list of covered drugs, called formularies. If they’re doing so at the start of the new calendar year, as appears to have happened in your case, the plan may notify you of the change when you fill the prescription for the first time in the new year. At that time, the plan would typically give you a 30-day transition refill so you can switch to another drug that’s on the formulary or start the appeals process to continue taking your current insulin drug, Novolin R.

To go that route, you would need to get your doctor to “make the case for why that formulary drug is not the right drug” for you, says Casey Schwarz, senior counsel for education and federal policy at the Medicare Rights Center, an advocacy group.

Small Business Tax benefits of Putting Spouse on Payroll

1. Build up tax-favored funds for retirement.

If you meet the tax-law requirements, your company can deduct contributions made to a qualified retirement plan on your spouse’s behalf. The annual limits are quite generous. If your company has a defined contribution plan, you can deduct contributions up to 25% of compensation or $54,000, whichever is less.

With a 401(k) plan, another dollar limit applies: Your spouse can defer up to $18,000 to the plan in 2017 (plus an extra $6,000 if he or she is age 50 or older). Your company can match those contributions wholly or partially up to tax-law limits.

2. Shift taxable income away from the company.

If you operate a C corporation, any compensation you pay to your spouse would have to stay with the company. Assuming your corporation is in a higher tax bracket than your personal tax bracket, you’ll save tax overall if your spouse draws a salary.

3. Get more tax mileage from business trips.

Generally, you can’t deduct the travel expenses attributable to your spouse if he or she accompanies you on a business excursion. However, if your spouse is a bona fide company employee and goes for a valid business reason, you may deduct his or her travel costs, including air fare, lodging and 50% of the meal expenses. The benefit is also tax free to your spouse.

4. Cure health insurance coverage ills.

If you’re already paying more to cover your spouse under your company health insurance plan, hiring him or her shifts the expense to your company. Typically, your company can deduct your spouse’s full health insurance cost.

5. Join the employer-paid life insurance group.

Your spouse is entitled to the same group-term life insurance coverage as your other employees.

Abusive Tax Avoidance Transactions (ATAT)

According to the IRS, the definition of ATAT is “An abusive tax avoidance transaction includes the organization or sale of any plan or arrangement promoting false or fraudulent tax statements or gross valuation misstatements, aiding or assisting in the preparation or presentation of a return or other document to obtain tax benefits not allowed by law, and actions to impede the proper administration of Internal Revenue laws. This general definition includes both tax shelters as defined in various sections of the IRC and other types of abusive tax promotions. These strategies may be organized and marketed, often through the internet. The definition is not merely limited to activities that reduce tax liability but may also include transactions that conceal assets and/or income from Collection.”

That, to me, is a lot of words that could be simply states as “any transaction that lacks a legitimate business purpose other than avoidance of paying to income and other taxes”. Let’s see if we can find a hypothetical example. Let’s assume that a group of business people who are citizens and tax residents of Country “A”, and Country “A” does not tax income earned outside the country until it is brought back into Country “A”. So if an internet business is established by residents of Country “A” but in a country that does not impose income tax (Country “B”), the profits of the business are not taxed anywhere but somehow the money needs to go back into the pockets of the stakeholders of the business but they don’t want to pay tax to country “A” or anyone for that matter. So if the business on Country “B” remits the profits to the stakeholders who live in Country “A” it gets taxed. But let’s assume that Country “A” has a treaty with Country “C” that exempts from income tax any dividends paid from a company formed in Country “C” to a stakeholder of that country who lives in Country “A”. So they set up a blocker that is owned by the original Country “A” stakeholders and that entity now owns the entity in Country “B”. So far that sounds like just sound tax planning.

But what if the money use to invest in the internet company comes from different people in different countries. As it is an internet company who knows who does what and bills for a variety of “services” are received from around the world and that money is paid to them via some international payment company similar to a global form of PayPal. Not you have hundreds of payments going around the world into different bank accounts in different countries and in different currencies (including crypto currencies).

To me none of the above transactions are actually legitimate business purpose transactions and only structured for the purpose of earning profits without paying tax and distributing those profits in a manner in which they are not taxed. That, in my mind is Abusive Tax Avoidance.

New York Individual Return Driver’s License Requirement

NYS is once again reminding taxpayers that tax returns (INCLUDING EXTENSIONS) MUST include information from their state driver’s license, including the NY document ID number (only NY has such a number), or provide other information. So even if you are filing an extension for additional time to file, NY and many other states will REJECT the extension or tax return AND NOT ACCEPT YOUR PAYMENT, This means that you will be charged late filing and late payment penalties if they reject your extension and payment.

Here is a copy of their notice:

Deductible 2017 Passive Property Disaster Losses

2017 was a horrific year for storms and the tourist industry in the Florida Keys was hit hard by Hurricane Irma which caused losses amounting to several $ Billion both in property damage as well as lost tourist revenue. The only saving grace was that, although rental income property operating losses are not deductible, casualty losses such as those suffered by property owners as a result of Hurricane Irma are not considered to be ordinary operating expenses and therefore an exception to the normal tax deduction suspension of rental income property losses.

In short, actual cash losses connected with the cost of replacing destroyed or damaged property which exceeded offsets by insurance ARE DEDUCTIBLE in 2017. To claim this deduction be certain to disclose the fact that you are a victim of a “disaster loss”. In the event that your actual cash casualty loss is greater than your total income for 2017, you may have excess losses that can be carried back to offset prior year income or carried forward, however you should check with your tax advisor regarding possible limitations resulting from the Tax Cut and Jobs Act of 2018.

IF YOU HAVE NOT BEGUN YOUR 2017 TAX RETURN…

The IRS has confirmed that they will begin accepting electronically filed returns on Monday January 29, 2018. However they announced that they will again be delaying any and all tax refunds that include credits for child care or low earned income. Also IRS stated that they will reject all tax returns that is silent regarding household members maintaining health care coverage.

Remember due dates for many tax returns changed last year and IRS and the states are charging (and not waiving) late penalties based on the new schedule.

FBAR-Foreign Bank Account Report-Due April 15

Form 1120S-Small Business Corporation-Due March 15

Form 1120-C Corporation-Due April 15

Form 1065-Partnership-Due April 15

Form 1040-Individual Income Tax Return-Due April 15

The above due dates do not reflect additional time granted for weekends or holidays.

IRS Scammers Still Looking to Get Your Cash

Just heard today from a client that she received a call from someone who claimed to be “the IRS” and she owed them $2,000 and there was a warrant for her arrest and if she did not pay exactly as instructed that she would be arrested within the hour. Well the must be catching fish or else they wouldn’t be fishing anymore.

Don’t be a fish that falls for this phony line. The IRS does not call out of the blue stating that you owe money without first sending you a notice in writing explaining the year, type of tax, amount that they believe that you owe and why. They do not just call out of the blue making threats.

(If they ask you to meet someone at some obscure location with cash agree to meet them but bring a cop with you)

However the scammers are getting wiser as too many people are now waking up to the fact that the scammers have duplicated IRS Form CP2000 letters demanding payment for an adjustment to the tax return. There are ways to spot this but the best was is to go to the IRS website and call the IRS (early in the morning before they get busy) so ask if they mailed you a notice.

Here are a few warning signs that a notice ‘from the IRS’ is fake:

• Appears to be issued from an Austin, Texas, address.
• Says the issue is related to the Affordable Care Act  and requests information regarding 2014 coverage.
• Lists the letter number in the payment voucher as 105C.
• Requests checks made out to I.R.S. and sent to the “Austin Processing Center” at a post office box.

PROBLEM ALERT

There used to be a standard process where the IRS sent a letter of “proposed correction” to your tax return, which showed the amount as filed, the proposed adjustment and the proposed adjusted amount and beneath it the taxes originally reported and proposed assessment. For some reason I am seeing more people claiming to receive notices of tax due without the opportunity to dispute the proposed assessment. So where I used to say that the IRS never sends a final tax bill before a proposed adjustment now it seems that things may have changed here as well. This is why if you receive a letter from what appears to be the Internal Revenue Service, before ignoring the letter either bring it to the attention of your accountant if you have one or call the IRS at 1-800-829-1040.

Also, payments are never made to the IRS. They are made to the United States Treasury.

New York State Taxpayer Protection Act

Governor Andrew Cuomo has proposed NYS tax reform that would eliminate the state income tax on wage earners. Instead, the state would levy a wage tax on the employer. By doing so, the tax burden would shift from workers — who face new limits on their ability to deduct state income taxes — to employers, who could still take full deductions for such payroll taxes. The legislation would spell out which kinds of companies would be eligible for this treatment.

Double taxation has been a basic premise to U.S. income dates, both domestic and international, since income taxes were first enacted by Article 13 of the U.S. constitution and is fundamental to all international tax treaties that the U.S. has signed. It is sad when our elected representatives in Congress sign tax legislation that they don’t understand.

Meals and Entertainment

Looks as though the new “business friendly” tax reform has eliminated the deduction for M&E expenses

Foreign crypto currency accounts need to be included in…

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.

2018 Tax Reform: Changes to Like Kind Exchanges and…

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.).

Tax Tips Jan-Feb 2018

Mileage Rates-2018

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.

2017 Payroll and 1099 Reporting due January 31-Message from…

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.

Filing methods

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.

Questions?

• 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 Tax Cuts and Jobs Act

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.

Foreign Information Report Penalties

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

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.

New Site In Progress

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.