Tax Guru – Ker$tetter Letter

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Effects of SALT Deduction Limit are Kicking In

Posted by taxguru on June 20, 2019

Back when the 2017 Tax Cuts & Jobs Act (TCJA) was being finalized and signed into law, many people were decrying one of its most ridiculous and unfair provisions, a cap of $10,000 on the Federal Schedule A deduction for State and Local income and property Taxes (SALT).  Rulers in states with higher than average tax rates, such as the Peoples Republic of California (PRC), New York and New Jersey, correctly predicted that this new limitation on the deductibility of SALT would increase the effective pain level of their taxation schemes for their citizens. Some attempted to get around this limit with ridiculous scams to recharacterize the tax payments as charitable contributions.  Those have been shot down; rightfully so.   

Now that many 2018 1040s have been prepared and taxpayers in the high tax States have been able to see the real world cost of this SALT limit, some are finally deciding that they have reached their tolerance level for how much they are willing to be fiscally raped by their State and local rulers, and are relocating to States with lower taxes.  As is the typical mindset for leftist rulers, their response to this exodus of their golden geese will be to increase the tax hits on those who stay behind.  As most clear thinking people can predict, this will just exacerbate the problem, pushing more and more fiscal rape victims beyond their breaking point. 

From FoxBusiness:

New York, California high-tax state exodus just beginning, expert warns

Low-tax states ramp up efforts to recruit unhappy SALT cap victims

 

As proponents of free market economics understand, these high tax states could reduce the outflow of tax paying people, and even encourage higher income people to move in, by lowering their tax rates.  However, this concept flies in the face of their mantra of “fairness,” which in their convoluted minds equates to punishing those they decree as “evil rich” by confiscating and redistributing their wealth.

 

Double Taxation
Because some people have classified this new limit on SALT deductions as being a form of “Double Taxation,” this would be as good a time as any for me to explain what that means.  In the income tax “game,” with all of its myriad of interconnected components, one of the most critical calculations is that of the actual Taxable Income that will be subjected to the various tax rates. 

One guiding general principle has long been that you are only taxed on the income that you have been able to keep.  For a business, this means net profit, which is the gross revenues minus the allowable deductions incurred in order to earn that income.  That’s fairly straight forward and generally includes most kinds of business expenses, except those explicitly prohibited by our imperial rulers in DC, such as Entertainment expenses and half of business meals.

For individuals, the calculation of taxable income is controlled by the whims of our rulers.  However, they have long allowed reductions from taxable income for many kinds of payments that reduce the amount of money you are keeping for yourself.  Some of the more common of these have included money donated to charities and payments of most kinds of State and Local Taxes (SALT). There has never been a deduction allowed from Federal taxable income for Federal income taxes.  So, to summarize the effect of this new SALT cap, if you paid $80,000 in SALT during the year, as was the case for some of our clients in the PRC, they are now forced to pay Federal income taxes on $70,000 of money that they were not actually allowed to keep because it was remitted to the State and their local Counties. 

Whether that is “fair” or not obviously depends on your definition of “fairness.”   In my opinion, this is not in the least fair.  And in an ironic twist, this new unfair tax on taxes paid really isn’t the fault of the rulers in those high tax states.  It is the product of the lunacy of the GOP Congress Critters who slapped together the crazy quilt called TCJA. I have no idea how involved President Trump was in the design of the details of TCJA, so I don’t know how much of this mess can be blamed on him.        

 

The Marriage Penalty
With all of the discussions about TCJA, which will never end, considering how insane and convoluted a piece of legislation it was, I haven’t seen anyone mention its effect on the “Marriage Penalty” that is built into the income tax system in our country. The fact that there are several provisions in the tax code that force married couples to pay more income taxes than would be the case if they were able to file as two single people, has been around since well before I started in the tax preparation profession back in 1975.  It has occasionally been addressed and somewhat reduced on a few occasions over the past decades.

However, when I was reviewing the details of TCJA back in December 2017, I couldn’t help but notice that most of the many new complicated limitations and phase-outs had exacerbated the penalty for married couples.  For example, the SALT limit is $10,000 for a couple filing jointly (MFJ) and also $10,000 for a Single taxpayer.  Thus, two single persons could deduct a total of $20,000 in SALT.  As has long been the case, it’s not possible for married couples to get around this by filing separate returns (MFS) because that filing status has several penalties built into it.  In this case, each spouse would only be able to deduct $5,000 of SALT on their 1040.

There are dozens of examples of this marriage penalty in our Tax Code.  Another example that has been around forever is the deductibility of capital losses against other kinds of income.  The limit is $3,000 on an MFJ 1040, $3,000 on a Single 1040 and just $1,500 on an MFS 1040.  TCJA has added a ton of new phase-outs for various credits and deductions that are based on the tax return’s Adjusted Gross Income (AGI).  In many of those cases, the MFJ phase-out limits are well below double the amounts for Single taxpayers.  Two single returns would have a much higher combined AGI limit before losing their eligibility for those credits and deductions than they would have on a MFJ return.  I admit that each of these Marriage Penalty items doesn’t increase the tax bill by a huge amount on its own.  However, all of them combined frequently add up to several thousands of dollars in extra taxes compared to the same income spread across two Single 1040s.

Back in the 1970s, 80, and 90s, I had done a lot of work with clients involving marriages and divorces in order to minimize the marriage penalties on their tax returns.  Before the big change to the Section 121 exclusion of gains on primary residence sales, which widened the exclusion from just $125,000 per person or per married couple to $250,000 per person and $500,000 per married couple, that one issue was the incentive for a lot of tax divorces in order to qualify for double the exclusion, $250,000 per couple versus $125,000.  In recent months, I have actually been contacted by some clients who have already noticed the TCJA increase in their marriage tax penalties and have inquired about the pros and cons of getting divorced for tax saving purposes.  Tax pros should be ready to help their clients analyze this aspect of tax planning because there is slim to zero chance of our rulers in DC doing the right thing and eliminating the Marriage Penalty in the Tax Code.

Posted in Deductions, marriage | Comments Off on Effects of SALT Deduction Limit are Kicking In

Blast From the Past

Posted by taxguru on June 9, 2019

From Episode 34 (Season3, Ep 4) of the Beatles Saturday morning cartoon show. Originally aired on Saturday, October 7, 1967.

For those unfamiliar with this show, the speaking voices were not by the actual Beatles, but the singing voices were theirs.

 

YouTube blocked me from posting this on my channel there. However, I was able to add some more cover versions of the TaxMan song to my YouTube Playlist.

 

Posted in Beatles, Music, TaxMan, video | Comments Off on Blast From the Past

Warning to High-Tax Refugees…

Posted by taxguru on May 15, 2019

Just as the antebellum plantation owners didn’t just roll over and allow their slaves to escape without attempting to bring them back, the rulers of the high tax states do often go after their escaping taxpayers for tax money, as in these recent articles about New York.  Making it even more difficult to defend against these kinds of attacks from your previous State’s tax agency is the fact that, as a non-voter in that state, you have no recourse through your elected officials.

New York, California get ‘aggressive’ when residents try to flee high taxes (FoxBusiness)

Tax collectors chase rich New Yorkers moving to low-tax states  (CNBC)

As residents flee New York’s high taxes, state uses intrusive audits to get cash from defectors (FoxNews)

 

NYTaxTorture(3-6-19)

None of these tactics  by New York should be news to listeners of the Rush Limbaugh show.  Rush constantly complains about being audited every year by the New York tax authorities, even though he relocated to Florida in 1996.  He is forced to document by several different means where he was working every single day of the year in order to prove that he didn’t earn any money inside the State of New York. 

Just as with the IRS and Federal tax issues, the burden of proof in State tax disputes lies with the taxpayer.  All it takes is for the IRS or State tax agency to accuse you of owing taxes and you are presumed to be guilty.  The tax agencies do not have to provide any substantiation for their claims.  The accused taxpayers have to come up with the evidence to prove that they don’t owe the money.

This isn’t a new issue in the tax world.  I have been dealing with the matter of the proper tax homes of clients for decades, especially in California, where clients have relocated their tax homes to tax free states, such as Nevada, Washington and Texas. I can also remember discussing the subject in many of my live tax seminars back in the 80s and 90s, with the example of George H. W. Bush.  While he and Barbara spent most of their non-DC time at their estate in Kennebunkport in Maine, they had established Texas as their official tax home so that none of their income was subject to income tax by Maine.  Their Texas residence was a hotel room.  

Avoiding taxes in high-tax states, especially Calif, used to be even harder to do for retired people.  Calif used to take the position that pensions were earned while working inside that state and even if the person retired to another state or country, Calif was entitled to its taxes on all of the pension benefits.  I can recall fighting with FTB over several of those kinds of cases.  Luckily, a law was passed a number of years ago preventing Calif and other tax-greedy states from taxing the retirement benefits of former residents.

As I have always made very clear, I am a huge proponent of people arranging their affairs, including where they live, to minimize the amount of their wealth that is confiscated by the various levels of government.  Relocating to a state with lower or zero taxes is still a very savvy tax savings strategy, especially with the new ridiculous $10,000 annual limit on the Schedule A deduction for State And Local Taxes (SALT) that should be the breaking point for more people to want to escape the clutches of the high tax jurisdictions.

Anyone who is planning to make such a move should definitely work with a professional tax advisor who can help them do it properly in such as way as to be able to defend against their former States’ tax agencies. 

NYRefugees(3-27-19)

Posted in StateTaxes | Comments Off on Warning to High-Tax Refugees…

Satire is more Accurate & Believable than Fake News

Posted by taxguru on April 20, 2019

We are definitely in strange times, where almost all of the conventional sources of information have abandoned any pretense of objective journalism and become vicious propagandists in support of their Marxist agenda.   Finding practitioners of good old fashioned true objective and skeptical journalism is a tough task.  A good philosophy has long been to consider the source when reading, seeing or hearing some bit of information.  What has been their past record for unbiased accuracy?  As anyone who has followed the mainstream media should realize, that record has been abysmal; which means that we need to start from the assumption that anything they say is wrong, aka Fake News, until proven by reliable unbiased sources to be accurate.   

Even more ironic than the realization that our news media cannot be trusted to give us anything resembling the truth, is the fact that websites that openly proclaim themselves to be satirical are often publishing material that is much more accurate than anything from the mainstream media. 

For example, these recent pieces from the amazingly creative team at The Babylon Bee are much more accurate and believable than anything from the mainstream, aka Drive-By, media.

Poll Finds Most People OK With Raising Taxes On Other People

IRS Still Waiting For Liberals To Voluntarily Mail Their Refund Checks Back

Everyone Who Attended Bernie Sanders’ Town Hall Has Reported Their Wallet Missing

Bernie Sanders Vows To Be More Generous With Your Money In The Future

Posted in BabylonBee, parody | Comments Off on Satire is more Accurate & Believable than Fake News

Do liberals voluntarily pay in more taxes?

Posted by taxguru on March 7, 2019

With their staunch opposition to any tax cut legislation, the Dims are perfect targets for this timely parody piece from one of my favorite humor sites, The Babylon Bee.

IRS Still Waiting For Liberals To Voluntarily Mail Their Refund Checks Back

Posted in parody | Comments Off on Do liberals voluntarily pay in more taxes?

Everyone has their breaking point…

Posted by taxguru on February 5, 2019

I never tire of these stories about people who have finally been hit with their final straw and decided to put an end to their fiscal rape by insatiable tax hungry State Rulers and physically relocate to less expensive locales.

High-Tax State Exodus

More people leaving New Jersey than arriving, moving company says

Texas, Florida see big population gains, while New York, Illinois see big losses, Census Bureau data show

Out-of-State Buyers Flock to Miami

With so much of their tax base fleeing their clutches, the State Rulers will continue to follow the path of squeezing even more out of those who remain within their jurisdiction.  The short-sighted Rulers have never been able to grasp the moral of Aesop’s “Goose That Laid the Golden Eggs” fable.

Just wait until people in those high tax states see their 2018 1040s during the upcoming Tax Season, with the amount of non-deductible state and local personal taxes because of the new ridiculously unfair $10,000 limit. That should trigger even more Tax Refugees.   

[Update 2/5/19] – New York’s Governor is feeling the pinch from the tax revenue lost due to taxpayers bailing from his State.

Cuomo Announces $2.3 Billion Revenue Shortfall: ‘God Forbid If the Rich Leave’

Posted in StateTaxes | Comments Off on Everyone has their breaking point…

As accurate as any other opinion survey…

Posted by taxguru on January 29, 2019

Poll Finds Most People OK With Raising Taxes On Other People

We Can No Longer Tolerate An Economic System Where The Rich Get Richer And The Poor Also Get Richer

While these may be from the Babylon Bee satire website; who can dispute the fact that they are very accurate representations of the mindset of the DemonRat Party?

Posted in BabylonBee, polls, TaxHikes | Comments Off on As accurate as any other opinion survey…

We’re in for a very bumpy Tax Season

Posted by taxguru on January 16, 2019

All last year, as we learned how messy and complicated the hastily drafted TCJA was, along with the absurdly redesigned 1040 forms, I warned that the 2019 filing season for 2018 tax returns would be a big mess.  Now, with the government shutdown, it is going to get even crazier for everyone, filers and preparers.

Since we are in uncharted waters here, uncertainty and confusion are the words of the Season.  I will try to post whatever useful info I come across on how to cope with this unusual situation.

Here are some resources I have seen:

The IRS official contingency plan for operating during the shutdown – 132 page PDF   

IRS’s Official Press Release on this situation.

Forbes Magazine’s much more concise summary of the IRS plan.

 

Tax Court is also delayed

The shutdown isn’t just affecting the IRS.  Its Tax Court has also been closed down, with trial sessions being canceled all over the country.  This is going to result in even longer delays in getting to trial than has already been the case for years. 

 

[Update 1/24/19]  From Politico:

IRS faces chaotic tax season amid shutdown

[Update 1/25/19] From Washington Post:

At least 14,000 unpaid IRS workers did not show up for work as broad shutdown disruption hits tax agency, according to House aides

[Update 1/26/19] From Washington Post:

IRS will need at least a year to recover from government shutdown, watchdog tells Congress

Posted in shutdown, TaxSeason | Comments Off on We’re in for a very bumpy Tax Season

What won’t the PRC Rulers tax?

Posted by taxguru on January 13, 2019

As anyone knows, an effective parody has to have a strong foundation in real world true facts.  

An excellent comment on the situation in California is this recent piece from the extremely creative satire website, The Babylon Bee.

California Legislature Unveils Plan To Raise Taxes On Wildfires Until They Move Out Of State

As with all of their parody articles, this one is very concise and pithy, as Bill O’Reilly used to say.  Check out the full thing, but this paragraph does an excellent job of describing the very real and very dangerous mindset of the bozos in power in Sacramento.

"Just as we’ve done with various businesses and private individuals, we will levy ever-increasing taxes on the fires," he said proudly. "Once they realize they’re being taxed to death, they’ll move on to greener pastures like Texas or Arizona." Brown said the taxes will be earmarked for public funding and pensions, but quickly added the state will likely "blow through the cash" on crazy pet projects faster than they could bring it in.

[Update 12/13/18]: Proving once again that the PRC Rulers are themselves parodies of actual leaders, they have one-upped the Babylon Bee by proposing to tax cell phone texts.

California mulls tax on text messaging

So, the question is still a very valid one.  Is there anything that the crazies on the left won’t tax in order to steal more money for themselves?  If George Harrison were still around, he would have to add so many things to his TaxMan song that it would be twice as long.

 

[Update 12/20/18]: The Babylon Bee has another great parody that could very well come true, given the environmental wackos’ insane blaming of humans breathing out carbon dioxide for the imminent destruction of the planet.

California Considering Tax On Breathing

This article includes another prediction that has actually already come true as part of the Federal TCJA, with its deduction limit of $10,000 for State and Local Taxes (SALT) on the 2018 Schedule A.

…California had unveiled a tax on taxes, charging residents a luxury tax for the privilege of being taxed.

[Update 1/13/19]:  This is not a parody, but one more indicator of California’s continuing slide into total socialism

Gavin Newsom’s budget calls for new tax on drinking water

Posted in Calif, parody, taxes | Comments Off on What won’t the PRC Rulers tax?

IRS Increases Standard Mileage Rate For 2019

Posted by taxguru on December 17, 2018

IRS has released its official standard mileage deductions for 2019, and the business rate has been increased by 3.5 cents over the 2018 rate.  This is the largest year to year jump in a very long time. 

While these amounts aren’t going to be used on actual tax returns for more than a year, many businesses use the official IRS rate for billing customers and for reimbursing employees; so this advance notice is useful right now. 

The IRS Announcement: IRS issues standard mileage rates for 2019

Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 58 cents per mile driven for business use, up 3.5 cents from the rate for 2018,
  • 20 cents per mile driven for medical or moving purposes, up 2 cents from the rate for 2018, and
  • 14 cents per mile driven in service of charitable organizations.

Posted in IRS, Vehicles | Comments Off on IRS Increases Standard Mileage Rate For 2019