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Archive for the ‘Deductions’ Category

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

Financial firms fleeing high-tax northeast for billionaire-packed Florida county

Taxes drive New Yorkers to Florida by the truckload in just a decade

 

From NY Post: Wealthy New Yorkers are ditching city’s high taxes for Miami

 

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

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

Show Biz Tax Breaks (re-post)

Posted by taxguru on June 21, 2016

The panel on The Jeselnik Offensive discusses tax deductions for rappers and comedians. 

I had posted this almost three years ago, but just now received a copyright complaint from Viacom via YouTube about its content, so I have uploaded it to WordPress instead.

 

 

 

Posted in Deductions, video | Comments Off on Show Biz Tax Breaks (re-post)

Defining “Placed Into Service”

Posted by taxguru on December 8, 2013

One common mistake taxpayers often make in regard to claiming Section 179 and depreciation deductions is the proper timing of it.  Many believe that they can simply pay for new equipment in the last month of their tax year (December for calendar year taxpayers) and claim the deductions on that year’s tax returns, even though the items aren’t received or used until the next tax year.  That issue led to this interesting recent email exchange from a reader. 

Reader:

Subject: What constitutes service for Section 179?

Dear Kerry,

Thought this might be something good to blog about, so I am sending you a question we receive mixed responses on…

We have recently agreed to purchase a piece of Large Medical Equipment. The agreement has been signed in December, and partial installation will occur in December with the full installation to complete in January.

We will begin training on the system in December. Can you help me understand the definition of “placed into service?” 

Officially, we will begin web-based training and didactic training in December on how to use the system, and a portion of the system will be installed. The product will not be fully installed until January, but essential parts (training, install) will begin in December.

Since the training process and installation begins (essentially starting the “use”) in December, will the equipment expense qualify for the Section 179 in 2013?

Thanks,

 

My Reply:

As much as I love to stretch the laws as much as possible in favor of the taxpayer, I wouldn’t feel comfortable deducting the cost of this new equipment on a 2013 tax return.

Placed into service generally means using the equipment itself for the business purposes, which would mean doing the analysis or tests on patients, or whatever the equipment is intended for.

Training on the actual operational equipment might be a closer step to a valid Placed in Service test; but the equipment not being operational and doing the training only on simulators just doesn’t cut it.

You’re just going to have to wait until your 2014 to deduct the cost of this equipment.

Good luck. I hope this helps.

You’re correct that this is a good topic to include in my blog. Thanks for writing.

Kerry Kerstetter

 

Follow-Up:

Thanks…interesting caveat…this type of equipment can take 1-2 months to install, and additional time to train all staff and doctors to finally “use on a patient.”

“Using” or “placed into service” really seems to be the key terms to understand. The company must train (aka: place into service) on the device prior to someone actually “using it” on a patient, and they will not begin training until it is purchased. So, in a fair world “use”, in my opinion should be the actual beginning of the training process. What a crazy world…

Thanks for writing back!

Sincerely,

 

My reply:

I wouldn’t feel comfortable trying to defend against IRS the beginning of installation and training as “placed into service.” However, if you and your professional tax preparer do choose to take such a stand, please keep me posted over the next few years as to whether IRS accepts your interpretation.

Good luck.

Kerry

 

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

 

 

Posted in 179, Deductions | Comments Off on Defining “Placed Into Service”

2014 IRS Standard Mileage Rates

Posted by taxguru on December 6, 2013

IRS has released their standard mileage rates for 2014 in plenty of time for those who use them as a guide for employee reimbursements to make the appropriate adjustments.

Beginning on Jan. 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56 cents per mile for business miles driven
  • 23.5 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

 

Posted in Deductions, IRS, Vehicles | Comments Off on 2014 IRS Standard Mileage Rates

Show Biz Tax Breaks

Posted by taxguru on July 11, 2013

The panel on The Jeselnik Offensive discusses tax deductions for rappers and comedians.

 

 

Posted in Deductions, humor, video | Comments Off on Show Biz Tax Breaks

Comparing Health Benefits By Entity Type

Posted by taxguru on December 28, 2012

These comparison charts from the Federal Tax Update webinar I attended last week are quite handy.  They illustrate one of the big differences in tax free owner benefits between S and C corps that I have long been discussing and why at least one C corp is almost always a must have.

 

 

 

From Tax Info

 

 

Posted in corp, Deductions | Comments Off on Comparing Health Benefits By Entity Type

2013 IRS Mileage Rates

Posted by taxguru on November 21, 2012

IRS has announced that, beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56.5 cents per mile for business miles driven
  • 24 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

 

Posted in Deductions, IRS, Vehicles | Comments Off on 2013 IRS Mileage Rates

Posted by taxguru on November 8, 2012

A possible tax hit for Sandy’s victims –  A handy summary of the Federal income tax rules for casualty losses. 

IRS Pub 547 has many more details.

 

Posted in Deductions | Comments Off on

2012 IRS Mileage Rates

Posted by taxguru on December 9, 2011

IRS Announces 2012 Standard Mileage Rates, Most Rates Are the Same as in July

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 55.5 cents per mile for business miles driven
  • 23 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

 

Posted in Deductions, IRS, Vehicles | Comments Off on 2012 IRS Mileage Rates