Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for December, 2017

Prepaying Taxes

Posted by taxguru on December 28, 2017

The new tax law does include a lot of changes; some good and some not so good.  Remember that the word “Reform” just means to change shape, not always as an improvement for the better.  This latest reformation-reformulation of our taxation policies does, surprisingly, eliminate and reduce a lot of deductions that have been around at least since many years before I started preparing tax returns in 1975. 

I don’t have time to discuss too many of the changes right now, as I have been busy doing a lot of year-end consulting with clients.  However one big change does need to be covered ASAP.  In fact, the following is based on some emails I sent to clients earlier today, who had asked about the idea of prepaying their property taxes before the end of this month.

As has been widely publicized, the new tax law, effective for 2018, puts a $10,000 cap on Schedule A deductions for State and Local taxes, including property taxes on personal use property.  There is no such limit on deducting taxes on business or rental properties, which are shown on different schedules with the 1040.

For those in high tax states such as Calif, this upcoming limit does have many people choosing to prepay some of their State and Local taxes before the end of 2017 in order to claim them without the limit on their deductibility.

There are special rules for deducting property taxes that do prevent too much prepayment.  The taxes paid and deducted have to be actually assessed and thus a true current liability. In Calif, the current year 2017/18 taxes are payable half by October 10, 2017 and the other half by April 10, 2018.  This means you can send the county the money for the 4/10/18 installment by 12/31/17 and deduct it on your 2017 1040. 

This is also the case for other states that allow their property taxes to be paid in multiple payments, such as Oklahoma that has due dates of December 31, 2017 and March 31, 2018 for their2017/18 tax assessments.   

Since taxes for the 2018/19 and future years have not yet been assessed, any payments sent in for those years are not legally deductible.  This has been such a hot topic that IRS issued a press release on this issue yesterday.

IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017

Income Taxes

While the above discussion focuses on property taxes, it also applies to payments of State income taxes, which are included in the new $10,000 limit.  The final 2017 estimated tax payments for both IRS and the States are technically due January 16, 2018.  For the past few months, with the threat of this new limit looming, I have been advising clients to send in their final 2017 ES payment by 12/31/17 in order to definitely be able to claim it.  Since Federal income tax payments are not deductible anywhere, making that final payment for 2017 in December or January makes absolutely no difference of any kind.

Just as with the issue of timing of a deduction for property taxes, a similar concept applies to State income tax payments.  Since 2017 is almost over and income taxes on what you earned are already accruing, you are allowed to deduct payments for your 2017 State income taxes.  You re not technically allowed to prepay in 2017 for what you expect your 2018 income taxes to be because as of 12/31/17, you have no legal liability for any 2018 income taxes. 

However there is an easy way around this little technicality if you are desperate to maximize your 2017 State income tax deduction.  You could send your State a huge check postmarked by 12/31/17 for thousands more than your 2017 taxes could possibly be and have it all applied to your 2017 account with the State.  Later on, when you file your 2017 State income tax return, have the overpayment rolled over to your 2018 account. 

I should point out that this discussion also applies to those folks who are lucky enough to reside in one of the cities that require their residents to pay separate City income taxes.

 

 

Taxes Are Not Donations

While this limit on deducting State and Local taxes was being debated over the past few months, some people suggested just claiming those payments as charitable donations on their tax returns as a way to avoid the $10,000 limit.  That idea would not fly for some very basic reasons. 

While it is true that governments do qualify as charities and deductions can be taken for voluntary contributions paid to them, that isn’t how tax payments work.  First is the fact that a legitimate deductible charitable donation has to be completely voluntary with no strings attached and nothing of value can be received back in return for the payment.  Nobody can say with a straight face that paying property and income taxes is in any way voluntary, or that nothing is received in return for those payments.  Paying those taxes allows you to keep the property and stay out of prison. Those are quite valuable things you receive in exchange for the “contributions” paid to the State and County.  Anyone who tries that trick will hasten their trip to the hoosegow. 

 

TaxCoach Software: Are you giving your clients what they really want?

Posted in Deductions, NewTaxLaws, PropertyTax, StateTaxes | Comments Off on Prepaying Taxes

2018 IRS Mileage Rates

Posted by taxguru on December 17, 2017

As we all get ready for the transition to living in the year 2018, IRS has released its official standard mileage deduction rates to be used on 2018 tax returns.  While the 2018 tax returns won’t be prepared until the 2019 Tax Season, these figures are more currently relevant since most businesses use the IRS rates for reimbursing their employees for business related trips in their personal vehicles.

From the IRS news release:

Beginning on Jan. 1, 2018, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 54.5 cents for every mile of business travel driven, up 1 cent from the rate for 2017.
  • 18 cents per mile driven for medical or moving purposes, up 1 cent from the rate for 2017.
  • 14 cents per mile driven in service of charitable organizations.

 

As always, I want to encourage everyone who uses their vehicles for business purposes to keep track of their actual expenses because they are frequently much higher than the IRS’s standard rate, especially for more expensive vehicles that get lousy gas mileage. 

This article on the AAA website shows their calculations of typical annual operating costs for different types of vehicles.  Using 15,000 miles per year, AAA came up with annual operating costs ranging from $6,354 (42.36 cents per mile) for small sedans to $10,054 (67.03 cents per mile) for pickup trucks.  

Posted in IRS, Vehicles | Comments Off on 2018 IRS Mileage Rates

More Tax Refugees Flee Illinois

Posted by taxguru on December 13, 2017

It always makes me feel good when I see stories like this…

Illinois Drives People Away. The taxpayer migration continues from the Land of Ever Higher Taxes.

…because it gives me hope that eventually, people will reach their breaking point in terms of accepting being fiscally raped by their State Rulers.

As is the case with other high tax states (Calif, New York, New Jersey, et al) the Leftist Rulers will once again illustrate their ignorance of basic real world economics and attempt to remedy their financial shortfalls by soaking the remaining residents even more, as per the fantasy world teachings of their mentor, Karl Marx.  They never seem to have enough foresight to see where that leads – to even more people fleeing to lower or no tax states.

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

Posted in StateTaxes | Comments Off on More Tax Refugees Flee Illinois

Catching Phony IRS Scammers

Posted by taxguru on December 4, 2017

I doubt there is anybody left in this country who hasn’t received a phony demand for money from scammers posing as IRS agents, whether by phone, email or snail mail.  I have been forwarding at least one such scam email to IRS’s special email address (phising@irs.gov) each week. 

Just as with other such scam emails, I have always been curious as to whether the crooks are ever caught.  This recent story about the arrest of three men in Georgia (USA, not Russia) and one in Illinois, with connections to a bigger organized crime operation in India, is a good sign that at least a few of the bad guys are being caught. 

With fake IDs, three Georgia men collected $666,537, prosecutors say

What is most mind boggling about these scammers is the fact that they allegedly conned 7,314 people to send them a total of almost $3.5 million for fictitious taxes.  Considering that this was just one gang, there have to be several others running the same kind of scam.  With all of the publicity about these scams, it’s a bit amazing that there are so many gullible folks who fall for it.  

IRS has a useful guide to dealing with these scams on their website that has been growing in size as more and more people get into this extremely lucrative criminal activity.

Tax Scams / Consumer Alerts

Posted in Crooks, IRS, scams | Comments Off on Catching Phony IRS Scammers