Tax Guru – Ker$tetter Letter

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IRS Filing Deadline Has Not Been Extended

Posted by taxguru on March 18, 2020

As is all too common, there is a lot of misinformation being reported by the media regarding the comments by the Treasury Secretary, Steven Mnuchin.  This has already led to widespread confusion among clients and the public at large.

For the past week, I was fully expecting to be able to write a headline that Tax Day was extended to July 15, which is what was widely speculated by the AICPA and other tax pros.

However, yesterday’s comments by Mnuchin were not as simple as giving everyone an additional 90 days (July 14) to file their 2019 income tax returns, or extensions.  What was actually announced was a 90 day grace period for paying taxes due for 2019, from the normal April 15 deadline to July 14, for up to one million dollars of taxes for individuals.  Tax returns or extensions still need to be submitted to IRS by April 15.

This interest free payment extension doesn’t give the level of stress reduction that was advertised.  Preparing tax returns and extensions is still a hassle that is added to the current extreme pressures from all of the closings, layoffs and cancelations around the country.  Idiotic is the word that comes to mind.

I am hopeful that there will be a great deal of push-back to this ridiculous plan and our rulers in DC do the right thing before April 15 and just set the filing date for 2019  tax returns and extensions as July 15. 

Posted in extensions, IRS, TaxDay | Comments Off on IRS Filing Deadline Has Not Been Extended

Virus Extends Filing Deadlines

Posted by taxguru on March 13, 2020

For the past several days, there has been a lot of speculation that all of the disruption surrounding the nationwide panic over the Wuhan Virus would motivate IRS to officially extend the upcoming filing due dates for 2019 income tax returns; March 16 for 1120S (S-corps) and 1065s (LLC & partnerships) and April 15 for personal (1040), trusts (1041) and Gift Tax (709) returns.  With today’s declaration by the President of a National Emergency, that should be a certainty.  However, no official announcement has yet been made by IRS on their news page.

Normally in situations of large disasters and emergencies, IRS is the first to issue such filing extensions so that affected people can focus on dealing with their more pressing problems.  The State tax agencies then usually follow suit with their own announcements of filing extensions.  Some States, such as California, have a policy of automatically complying with any IRS sanctioned extension of filing deadlines.  In the current situation, the Calif Franchise Tax Board (FTB) has beaten IRS to the punch and has issued its own press release giving a new due date of June 15 for all tax returns that are due March 16 and April 15.  

This is different from a normal extension that taxpayers file, because that kind is only for requesting an extension of time to file the tax returns.  It is not an extension of time for paying the taxes owed.  Penalties and interest are assessed on late payments of taxes, while the normal extension avoids the much more expensive late filing penalties.  This new emergency related extension allows all Calif. taxes for 2019 to be paid up until June 15 without any additional charges for penalties or interest. 

Whether this June 15 date will stick as the due date will obviously depend on how long it takes for the panic in the country to subside and things to get back to normal.  If the virus scare stretches out for months and months. there is a possibility that the June 15 due date will itself be extended.

I intend to add to this post as news comes out, including the anticipated IRS announcement, as well as any by other States.

This is definitely going to be another very strange Tax Season.

[Update 3/14/2020] – Still no official announcement from IRS.  The U.S. Tax Court has announced that it has cancelled all of its March and April trials, which will really back things up for them.

[Updates 3/15/2020] – Still no official announcement from IRS. I’ve seen some mentions that any delay in deadlines requires an act of Congress, which makes no sense.  For the past several years, whenever there has been a presidentially declared disaster or emergency, such as from hurricanes and tornadoes, IRS has been pretty quick to announce official extensions of time to file returns for those in the affected areas, without any congressional action. On March 6, IRS announced an extended filing deadline of July 15 for those in the vicinity of the Nashville Tennessee tornadoes. This current virus panic is the same kind of thing, although on a much larger geographic scale, the entire country.

Some free tax assistance services, such as AARP’s Tax-Aide, have announced they have shut down due to this current health scare.  Seeing as how the affects of this virus are supposed to be much more dangerous for us older folks, that does seem to be a very prudent move.  As I have had to constantly remind clients, whenever it is necessary to prioritize between tax and health matters, health should always be first in line, with or without any official IRS permission.

Posted in Calif, extensions, IRS, TaxDay, TaxSeason | Comments Off on Virus Extends Filing Deadlines

Why Claiming Social Security ASAP Makes the Most Sense

Posted by taxguru on February 1, 2020

From a recent email I sent to a client:

One of the most common questions I encounter is when is it best to make your initial claim to start drawing your benefits from Social Security (SSA).

When I notice that clients are over 62 and thus eligible to make an early claim for their Social Security benefits, I wonder if they have considered doing that or are waiting based on the promise of higher payments by deferring their initial claim.  There is a lot of misinformation floating around on this topic, which I have a lot of experience with, for ourselves as well as for clients. For several reasons, it has always been my belief that it’s the best strategy to claim SS as soon as possible rather than hold off for what may very likely be much less money several years down the road.

In spite of the big PR push by SSA and some supposed financial wizards, delaying when you officially request to start receiving your benefits is a very unwise move.  There are lots of seminars and fancy software designed to make the supposedly scientific calculations as to when the optimal date would be from a financial perspective.  Those kinds of pure math calculations are bogus for a number of very important and valid reasons.

1. Life Expectancy – The supposedly higher benefits promised for those who wait to make their claim only make financial sense if you are 100% positive that you will live well into your 90s, just to break even with what you would have from an early claim.  Since that kind of guarantee is an impossibility here in the real world, it’s ridiculous to accept that premise as a sure-fire payoff.

2.  No Real Money in Account – Unlike the perception many people have that the SS taxes paid in are sitting safely in a trust account in DC, nothing could be further from the truth. Unlike true non-government retirement accounts, such as IRAs, unreceived SS benefits are not assets that can be left to others after your passing.  A surviving spouse can possibly receive some part of your benefits, but combined with her own benefits, the total will be much lower than what you had been receiving while alive.

3.  Changes In The System – As has been known for a long time, the huge number of Baby Boomers cashing in on their SS is draining SSA’s reserves so quickly that drastic changes are going to be required soon.  As has happened in past years, our Rulers in DC can modify the details of the SS system at any time they choose.  Some of the serious proposals being discussed in DC include:

A.  Raising the benefit eligibility age to 70, 75 or later so that more people will pass away before making their claims.

B.  Reducing the payout of benefits across the board to something like 50% to 80% of the current payment structure.

C.  Means Testing, where people with income and/or net worth over an arbitrary level will receive reduced or zero SS benefits, regardless of what they had paid in during their working lives.

All of these proposed changes are expected to be only applicable for new SS claimants, and not for those who have already begun receiving their SS benefits.  Any reduction in payments to current SS recipients would be curtains for any Congress-critters who vote for that, which they well know.

Bottom line, the only smart play is to take the SS benefits as soon as you are allowed, which is currently at 62.  That’s what Sherry and I have done and what I have been advising clients for decades. The old cliché “A bird in the hand is worth two in the bush” fits perfectly here.

Verify Recorded Earnings – Here’s a tip for you, based on what I had to go through.  Check your official earnings statement with SSA and see if they have included everything you earned in salaries and self employment income over your lifetime.  Unearned (not service) income, such as interest, capital gains, rents and royalties, are not included in the income that counts towards SS benefits. If you see any large amounts missing, start an appeal with them ASAP.  You should still apply for your benefits before your 62nd birthday, even if the earnings history has some gaps.  It took them a year and a half to correct some missing income from my records, but in the meantime I received monthly payments and then a very large retroactive catch-up payment when they finally made the proper adjustments.

Penalty on Too Much Earned Income – As has long been the case, the SS system has a penalty for those people who receive more than a certain amount of earned income while drawing their benefits prior to their full retirement age (FRA), which is 66 years and two months for you.  For 2020, this limit is $18,240.  SS benefits for someone under his/her FRA are reduced by 50% of the earned income over that threshold amount.  While this often scares some people enough to delay their initial benefit claim, this is super easy to avoid if you can adjust your income sources to be unearned kinds of income, such as rents or royalties, instead of W-2 wages.   This is a much easier task to accomplish when you have control over the business you are working in than if you were working for a huge entity.

I wanted to pass this along and hope it gives you some food for thought.  I realize it is very different from the current “conventional wisdom” that is hyping the delay for higher future benefits propaganda. My take is based on real world analysis of things, which includes the fact that all of those delayed calculations are based on living to a very ripe old age.  While that is something we all wish to achieve, we all know of examples where lives have ended all too soon and without any warning.

I have attached a Short summary of the rules for Social_Security_and_Medicare, which you will be automatically enrolled into this year when you turn 65.  I will be as well, and I am not looking forward to doing the research for which Medigap policy to sign up for.

Let me know if you have any questions about any of this.

Posted in social security | Comments Off on Why Claiming Social Security ASAP Makes the Most Sense

IRS Mileage Rates For 2020

Posted by taxguru on December 31, 2019

A few weeks later than has usually been the case, IRS just today released its standard mileage rates for vehicle usage in 2020.  While these rates won’t be used on actual tax returns until more than a year from now, most businesses use the official IRS rates for charging customers and for reimbursing employees; so this is very relevant information for immediate use.

Beginning on January 1, 2020, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 57.5 cents per mile driven for business use, down one half of a cent from the rate for 2019,
  • 17 cents per mile driven for medical or moving purposes, down three cents from the rate for 2019, and
  • 14 cents per mile driven in service of charitable organizations.

IRS Press Release: IRS issues standard mileage rates for 2020

I long ago gave up on ever understanding why IRS and the tax writers in Congress believe that vehicles cost less to operate when used for charity, medical or moving.  Like many aspects of tax law, we just have to accept it as gospel because our Rulers in DC consider themselves to be so much wiser than we “normal” little people are.

Posted in IRS, Vehicles | Comments Off on IRS Mileage Rates For 2020

Liberty Tax Service Busted By Feds

Posted by taxguru on December 12, 2019

Since they cater to a completely different kind of clientele than we work with, I haven’t made much effort to keep up with the latest workings of the big assembly line tax prep services.

While the long held stereotype for H&R Block has been that they don’t work as hard to use all of the tricks of the trade to legally minimize taxes for their clients, I had no idea that the guys who pay people to stand on street corners in Statue of Liberty costumes have had an established corporate culture of preparing fraudulent tax returns, as described in this recent news release from the U.S. Dept of Justice:

Justice Department Announces Settlement With Liberty Tax Service

With this heavy scrutiny on their tax prep practices, we can only guess as to how much longer they can stay in business.

It will also be very interesting to see if any of the other big assembly line tax prep services mention these legal problems that Liberty has been having in their ads.  That market is very competitive, so it is entirely possible that one or more of the other companies will contrast themselves as being free of this kind of scandal and government investigation.

 

 

Posted in Fraud, preparers | Comments Off on Liberty Tax Service Busted By Feds

IRS Releases 2020 Inflation Adjustments

Posted by taxguru on November 6, 2019

IRS has done its official calculations of the adjustments that will be required for more than 60 tax provisions in the year 2020.

Their Press Release:  IRS provides tax inflation adjustments for tax year 2020

All of the juicy details are in this 28 page PDF of Revenue Procedure 2019-44

A handy one-page version of the changes compared to previous years from TheTaxBook: 2019-11-13_Inflation_Adjusted_Amounts_for_2020

 

Gifting Exclusion

The Number One question I constantly receive regarding these IRS inflation adjustments has to do with the annual exclusion from Gift Tax reporting because many people structure their estate plans based on gifting the maximum each year.  Unlike most of the other inflation adjusted provisions, which do increase every year, the amount of the annual Gift Tax exclusion is only allowed to increase when the cumulative inflation factor warrants an increase of a full $1,000.  This does make a lot of sense.  Otherwise, the exclusion amount would be very odd, not round, figures that would be very confusing to keep track of.  For 2020, there will be no increase in the annual Gift Tax exclusion.  It will remain at $15,000 per donor (giver) per donee (recipient).

Posted in inflation, IRS | Comments Off on IRS Releases 2020 Inflation Adjustments

Unfair, But Legal

Posted by taxguru on October 1, 2019

The Tax Code in this country is filled with stupid and unfair laws.  The new $10,000 limit on the deductibility of State And Local Taxes (SALT) on 1040s is just one of the many new idiotic rules included in TCJA.  However, that is the right of our elected officials in DC, to establish such insane limits.  As much as we need States to defend their rights against Federal encroachment, they don’t have a right to overturn Federal laws.

This recent case shot down such an attempt by four East Coast high tax states, whose residents have been hit by the new SALT limit.

Victory for Trump Tax Reform: Federal Court Upholds State, Local Deduction Limits

I would love to see this extremely unfair and ridiculous limit repealed, but unfortunately, it will have to be done by our imperial rulers in DC.

Posted in SALT | Comments Off on Unfair, But Legal

Adjusting Costs For Inflation When Computing Cap Gain Taxes?

Posted by taxguru on July 31, 2019

One of the many extremely unfair aspects of the tax system in this country that I have long railed against is the fact that, when assets that have been owned for several years are sold, the taxable gain is based on the original cost, with no adjustment for the fact that the dollars being recovered are worth much less today than what was paid out those many years ago.  Current year tax rates are literally assessed on inflation.

Over the past three decades, there have been some feeble attempts to remedy this injustice by allowing people to adjust their cost bases by the changes in the cost of living.  I have written and spoken about this in great detail since 1992, when it seemed to have some momentum, only to fizzle out under the wimpy gutless leadership of both Bush presidents.

Some historical references on this issue:

My article from the 1990s on this topic has been on my main website ever since then: Indexing Gains For Inflation

The Wall Street Journal article addressed to Pres. George H.W. Bush from 8/31/92 that got a lot of us excited at the time: An Act of Leadership

A similar press release from the National Taxpayer Union on 1/23/08 addressed to Pres. George W. Bush: Bush Can Bolster Economy by Ordering Inflation-Indexed Cap Gains Taxes, Legal Brief Says

The actual report from August 1992 that is discussed in the above articles, describing the authority that the Treasury Dept. has to define Cost Basis as being inflation adjusted: 96 page PDF

 

The reason I am bringing this issue back up for discussion is the following very encouraging news from the U.S Senate:

Cruz Pushes Mnuchin for Quick Action on Capital Gains Tax Break

I doubt that I am alone in thinking that things are very different nowadays in terms of the odds of such a change finally being made.  As was illustrated, both Presidents Bush were extremely wimpy and utterly scared to death to do anything that would offend the media and the Dims, such as authorizing anything that would be propagandized by them as a boondoggle for the evil rich at the expense of the poor working slobs.  Both of them were too scared to do the right thing and implement this change in policy to allow the cost basis of capital assets to be adjusted for inflation.  Now that we have someone in the White House who seems to relish taking on the status quo and cares not a whit about offending the Dims and their media cohorts, we should finally have a much better chance of seeing this long overdue change enacted.

Posted in CapGains, inflation | Comments Off on Adjusting Costs For Inflation When Computing Cap Gain Taxes?

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

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