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12/19/2017

What the Tax Reform Bill Means For Individuals

Although the exact details are not yet confirmed, we expect a number of changes in the new tax reform bill will affect individuals of all incomes.   The Journal of Accountancy, a leading resource on legislative matters affecting accounting regulations, has issued the following summary of the tax bill's expected reforms.  As a service to you, we are providing this summary in its entirety for your review.  Please contact us to set up a tax planning session to review strategies that you may now need to include in your individual tax plan.

What the Tax Reform Bill Means For Individuals

The Tax Cuts and Jobs Act, H.R. 1, agreed to by a congressional conference committee on Friday and expected to be voted on by both houses of Congress during the week of Dec. 18, contains a large number of provisions that would affect individual taxpayers. However, to keep the cost of the bill within Senate budget rules, all of the changes affecting individuals would expire after 2025. At that time, if no future Congress acts to extend H.R. 1’s provision, the individual tax provisions would sunset, and the tax law would revert to its current state.

Here is a look at many of the provisions in the bill affecting individuals.

Tax rates

For tax years 2018 through 2025, the following rates would apply to individual taxpayers:

Single taxpayers

Taxable income over

But not over

Is taxed at

$0

$9,525

10%

$9,525

$38,700

12%

$38,700

$82,500

22%

$82,500

$157,500

24%

$157,500

$200,000

32%

$200,000

$500,000

35%

$500,000

 

37%


Heads of households

Taxable income over

But not over

Is taxed at

$0

$13,600

10%

$13,600

$51,800

12%

$51,800

$82,500

22%

$82,500

$157,500

24%

$157,500

$200,000

32%

$200,000

$500,000

35%

$500,000

 

37%


Married taxpayers filing joint returns and surviving spouses

Taxable income over

But not over

Is taxed at

$0

$19,050

10%

$19,050

$77,400

12%

$77,400

$165,000

22%

$165,000

$315,000

24%

$315,000

$400,000

32%

$400,000

$600,000

35%

$600,000

 

37%


Married taxpayers filing separately

Taxable income over

But not over

Is taxed at

$0

$9,525

10%

$9,525

$38,700

12%

$38,700

$82,500

22%

$82,500

$157,500

24%

$157,500

$200,000

32%

$200,000

$300,000

35%

$300,000

 

37%


Estates and trusts

Taxable income over

But not over

Is taxed at

$0

$2,550

10%

$2,550

$9,150

24%

$9,150

$12,500

35%

$12,500

 

37%


Special brackets would apply for certain children with unearned income.

Standard deduction: The bill would increase the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of households, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers is not changed by the bill.

Personal exemptions: The bill would repeal all personal exemptions through 2025. The withholding rules will be modified to reflect the fact that individuals can no longer claim personal exemptions.

Passthrough income deduction

For tax years after 2017 and before 2026, individuals would be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorships, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. (Special rules would apply to specified agricultural or horticultural cooperatives.)

A limitation on the deduction would be phased in based on W-2 wages above a threshold amount of taxable income. The deduction would also be disallowed for specified service trades or businesses with income above a threshold.

For these purposes, “qualified business income” would mean the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. These items must be effectively connected with the conduct of a trade or business within the United States. They do not include specified investment-related income, deductions, or losses.

“Qualified business income” would not include an S corporation shareholder’s reasonable compensation, guaranteed payments, or—to the extent provided in regulations—payments to a partner who is acting in a capacity other than his or her capacity as a partner.

“Specified service trades or businesses” include any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees.

The exclusion from the definition of a qualified business for specified service trades or businesses phases in for a taxpayer with taxable income in excess of $157,500 or $315,000 in the case of a joint return.

For each qualified trade or business, the taxpayer is allowed to deduct 20% of the qualified business income with respect to such trade or business. Generally, the deduction is limited to 50% of the W-2 wages paid with respect to the business. Alternatively, capital-intensive businesses may yield a higher benefit under a rule that takes into consideration 25% of wages paid plus a portion of the business’s basis in its tangible assets. However, if the taxpayer’s income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 20% of the qualified business income with respect to each respective trade or business.

Child tax credit

The bill would increase the amount of the child tax credit to $2,000 per qualifying child. The maximum refundable amount of the credit would be $1,400. The bill would also create a new nonrefundable $500 credit for qualifying dependents who are not qualifying children. The threshold at which the credit begins to phase out would be increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.

Other credits

The House version of the bill would have repealed several credits that are retained in the final version of the bill. These include:

  • The Sec. 22 credit for the elderly and permanently disabled;
  • The Sec. 30D credit for plug-in electric drive motor vehicles; and
  • The Sec. 25 credit for interest on certain home mortgages.

The House bill’s proposed modifications to the American opportunity tax credit and lifetime learning credit also did not make it into the final bill.

Education provisions

The bill would modify Sec. 529 plans to allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. Certain homeschool expenses would also qualify as eligible expenses for purposes of the Sec. 529 rules.

The bill would modify the exclusion of student loan discharges from gross income, by including within the exclusion certain discharges on account of death or disability.

The House bill’s provisions repealing the student loan interest deduction and the deduction for qualified tuition and related expenses were not retained in the final bill.

The House bill’s proposed repeal of the exclusion for interest on Series EE savings bond used for qualified higher education expenses and repeal of the exclusion for educational assistance programs also do not appear in the final bill.

Itemized deductions

The bill would repeal the overall limitation on itemized deductions, through 2025.

Mortgage interest: The home mortgage interest deduction would be modified to reduce the limit on acquisition indebtedness to $750,000 (from the current-law $1 million).

A taxpayer who has entered into a binding written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017, under this provision, meaning that they will be allowed the current-law $1 million limit.

Home equity loans. The home equity loan interest deduction would be repealed through 2025.

State and local taxes: Under the final bill, individuals would be allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes.

The conference report on the bill specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.

Casualty losses: Under the bill, taxpayers can only take a deduction for casualty losses if the loss is attributable to a presidentially declared disaster.

Gambling losses: The bill would clarify that the term “losses from wagering transactions” in Sec. 165(d) includes any otherwise allowable deduction incurred in carrying on a wagering transaction. This is intended, according to the conference report, to clarify that the limitation of losses from wagering transactions applies not only to the actual costs of wagers, but also to other expenses incurred by the taxpayer in connection with his or her gambling activity.

Charitable contributions: The bill would increase the income-based percentage limit for charitable contributions of cash to public charities to 60%. It would also deny a charitable deduction for payments made for college athletic event seating rights. Finally, it would repeal the statutory provision that provides an exception to the contemporaneous written acknowledgment requirement for certain contributions that are reported on the donee organization’s return—a current-law provision that has never been put in effect because regulations have not been issued.

Miscellaneous itemized deductions: All miscellaneous itemized deductions subject to the 2% floor under current law would be repealed through 2025 by the bill.

Medical expenses: The bill would reduce the threshold for deduction of medical expenses to 7.5% of adjusted gross income for 2017 and 2018.

Other provisions

Alimony: For any divorce or separation agreement executed after Dec. 31, 2018, the bill would provide that alimony and separate maintenance payments are not deductible by the payor spouse. It would also repeal the provisions that provide that such payments are includible in income by the payee spouse.

Moving expenses: The moving expense deduction would be repealed through 2025, except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station.

Archer MSAs: The House bill would have eliminated the deduction for contributions to Archer MSAs; the final bill does not include this provision.

Educator’s classroom expenses: The final bill does not change the current-law allowance of an above-the-line $250 deduction for educators’ expenses incurred for professional development or to purchase classroom materials.

Exclusion for bicycle commuting reimbursements: The bill would repeal through 2025 the exclusion from gross income or wages of qualified bicycle commuting expenses.

Sale of a principal residence: The bill would not change the current rules regarding exclusion of gain from the sale of a principal residence.

Moving expense reimbursements: The bill would repeal through 2025 the exclusion from gross income and wages for qualified moving expense reimbursements, except in the case of a member of the armed forces on active duty who moves pursuant to a military order.

IRA recharacterizations

The bill would exclude conversion contributions to Roth IRAs from the rule that allows IRA contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA. This would prevent taxpayers from using recharacterization to unwind a Roth conversion.

Estate, gift, and generation-skipping transfer taxes

The bill would double the estate and gift tax exemption for estates of decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026. The basic exclusion amount provided in Sec. 2010(c)(3) would increase from $5 million to $10 million and would be indexed for inflation occurring after 2011.

Alternative minimum tax

While the House version of the bill would have repealed the alternative minimum tax (AMT) for individuals, the final bill keeps the tax, but increases the exemption.

For tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026, the AMT exemption amount would increase to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return) and $70,300 for all other taxpayers (other than estates and trusts). The phaseout thresholds would be increased to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers (other than estates and trusts). The exemption and threshold amounts would indexed for inflation.

Individual mandate

The bill would reduce to zero the amount of the penalty under Sec. 5000A, imposed on taxpayers who do not obtain insurance that provides at least minimum essential coverage, effective after 2018.

Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.

If you have questions about how the tax law changes will affect your business and what your next steps should be, please contact us online or call 816.741.7882 to set up an appointment to discuss details with one of our tax planning experts at McRuer CPAs.

02/13/2017

EITC Refunds Slow

Big-tax-refundChanges in tax law may cause a delay in receiving tax refunds for early tax filers.  New in 2017, the 2015 Protecting Americans from Tax Hikes (PATH) Act has moved up the Forms W-2 filing deadline for employers and small businesses to January 31st from the previous end-of-February deadline.  The new deadline also applies to certain Forms 1099.  The new January 31st deadline is designed to help the IRS spot errors in early returns filed by taxpayers.  Having the Forms W-2 and 1099 sooner makes it easier to verify legitimate tax returns and send out refunds.

However, the changes will mean that early tax filers who apply for certain tax credits should expect that their refunds will arrive later than in past years.  If you claim the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC), the law prevents the issuing of the refund(s) until February 15th.

The way the calendar dates occur this tax season, even if a qualifying taxpayer has a refund issued on the first available day, February 15th, the money may not arrive even through a direct deposit until the week of February 27th.  Financial institutions need a few days to process the deposits and many do not process payments on weekends or holidays.  The President’s Day holiday on February 20th will also delay processing.  If a taxpayer has requested their refund to be paid by check, the delay in receiving payment could be several days or weeks longer, even into March.

01/03/2017

2016 Individual Income Tax Filing Season Launches January 23

Taxtime graphicThe tax season for processing 2016 federal income tax returns begins Monday, January 23, 2017.  The tax day deadline will be April 18th this season, to adapt to the Easter holiday weekend.

The IRS says it would start accepting electronic tax returns on January 23rd and it anticipates more than 153 million individual tax returns to be filed.  This, as Congress is expected to continue tight budget constraints on the agency under a new administration.  Taxpayer advocates warn taxpayers to expect delays in processing, more computer-driven automatic correspondence audits (letters that are sent by computers to taxpayers when a tax return issue raises a flag without a preliminary review by human eyes), and extremely long wait times should a taxpayer need to connect with the agency to ask a question or respond to a correspondence audit.

Taxpayers may also be affected by a new law that requires the IRS to hold tax refunds claiming the Earned Income Tax Credit and the Additional Child Tax Credit until February 15th.  The IRS says the delays are due to the additional time needed for these tax refunds to be released and processed through financial institutions.  Factoring in weekends and the President’s Day holiday, the IRS is warning many affected taxpayers may not have actual access to their tax refunds until the week of February 27th, if they have filed a completed tax return by the end of January.  

For more information on the status of a refund, a taxpayer may use the online resource called "Where's My Refund?".

03/03/2016

Kids and Tax Breaks: The "Perfect" Match

If you have kids, you have tax breaks, maybe more than you know. In 2015, Congress passed “Tax Extenders” legislation and within it were three permanent extensions related to children. These tax breaks are out there to be taken, so we are providing a summary version to help you determine if you can use them.

The $1,000 child tax credit that so many taxpayers claim, and even count on, is not going to reduce or disappear. Having survived through extensions since the amount was set in 2003, it will now always be $1,000 per child.

My Family_jpgIt will help to know the following information for the next child-related benefit:  A 2009 refundable credit of 15% of earned income in excess of $3,000 was slated to jump to a qualifying amount of $10,000 in 2017.  Not any more—the $3,000 threshold has also been made permanent, providing extra help for millions of families.

Have kids in college? Once again there’s “forever” help, as related credits have been ensured and thresholds lowered through the Enhanced American Opportunity Tax Credit extension. Taxpayers can count on a $2,500 tax credit for four years of post-secondary education, instead of the $1,800 credit that would have taken place in 2017. Lower qualifying thresholds would have also happened in 2017, and now they will stay at $80,000 (single) and $160,000 (married, filing jointly).

And, did you know that there are other child credits in the tax system that you might qualify for like child and dependent care expenses and even summer day camps? If you didn’t, be assured that we do and are ready to help you see if you qualify.

If you need more information, please contact one of our tax preparation experts at McRuer CPAs.

12/18/2015

2015 Tax Extenders Summary

After months of uncertainty and speculation, it appears Congress has finally sufficiently collaborated to propose the “Tax Extenders” legislation in which a large number of expired tax provisions will be extended, some permanently.  Some tax credits that would be made permanent include the Child Tax Credit, the American Opportunity Tax Credit and the Earned Income Tax Credit

Of particular interest, it appears Section 179 will be permanently fixed at $500,000 of qualified assets for years in which taxpayers place in service up to $2,000,000 of assets.  For amounts above $2,000,000, the Section 179 deduction is reduced dollar for dollar until $2,500,000, at which time no asset additions are eligible.  Bonus depreciation is temporarily extended at 50% for 2015, 2016 and 2017, then stepped down to 40% in 2018 and 30% in 2019, after which time it is scheduled to be completely phased out.

To find out more information about the specifics of the legislation, here are some online resources:

If you have any questions about how these tax extenders may affect you or your business bottom line, please contact us at McRuer CPAs by calling 816.741.7882 or click here to connect with us online.

03/26/2015

New Tax Laws Affecting 2015 Income Taxes

What's new?As we complete and file our 2014 federal income tax returns, this is a good time to make adjustments as needed affecting our current-year 2015 income tax plan.  To help, the IRS has released its list of new income tax changes, rates and updates that are now in effect.

As a reminder, federal income tax is designed to be a pay-as-you-go tax.  You are obligated to pay taxes throughout the year as you earn or receive income, and you may be subject to penalties if you don’t.  You may pay through payroll withholding, or by paying estimated taxes.  

The new updates regarding deductions and exemptions may directly affect the tax you owe.  Consider our tax planning services to give you a year-round tax perspective so the annual tax preparation season will go smoother with fewer surprises.

Standard Mileage Rates:  For taxpayers claiming itemized deductions, including deducting the cost of operating your personal vehicle for business purposes, the standard mileage rate allowed for business miles driven is now 57.5 cents per mile, up from 56 cents in 2014.

The business standard mileage rate is based on a combination of annual averages of fixed and variable costs of operating a vehicle including not only gas and oil, but also depreciation, insurance, tires and average maintenance and repairs.  Some taxpayers may enjoy a greater tax benefit by itemizing their actual annual vehicle costs, but they must choose between the actual costs method and the standard mileage rate deduction.

If you will drive more than usual for medical expenses or because of a move this year, the rate has dropped to 23 cents per mile for this year, down a bit from 2014’s rate of 23.4 cents.  The mileage rate allowed for miles driven in service of a charitable organization remains at 14 cents per mile.

Personal Exemptions ChangesFor 2015, the personal exemption amount has increased for certain taxpayers.  It has increased to $4,000 for taxpayers with adjusted gross incomes at or below $309,900 if married filing jointly or if a qualifying widow(er), $284,050 if a head of household, $258,250 if single, or $154,950 if married filing separately. The allowed personal exemption amount for taxpayers with adjusted gross incomes above these thresholds has been reduced from 2014 and may be calculated using a new Personal Allowances Worksheet.

Itemized Deductions Limitation:  Now in 2015, the total amount allowed for itemized deductions is reduced for taxpayers with adjusted gross income above $309,900 if married filing jointly or a qualifying widow(er), $284,050 if head of household, $258,250 if single, and $154,950 if married filing separately.

Alternative Minimum Tax (AMT) Exemption: The AMT exemption amount is increased to $53,600 ($83,400 if married filing jointly or qualifying widow(er); $41,700 if married filing separately).

Lifetime Learning Credit Income Limits: In order to claim a Lifetime Learning Credit of up to $2,000, your Modified Adjusted Gross Income (MAGI) must be less than $55,000, that’s down considerably from $64,000 in 2014 ($110,000 if married filing jointly, down from $128,000).

Adoption Credit or Exclusion: The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $13,400.  In order to claim either the credit or exclusion, your MAGI must be less than $241,010.

Earned Income Credit (EIC): You may be able to claim the EIC in 2015 if: three or more children lived with you and you earned less than $47,747 ($53,267 if married filing jointly), two children lived with you and you earned less than $44,454 ($49,974 if married filing jointly), one child lived with you and you earned less than $39,131 ($44,651 if married filing jointly), or a child did not live with you and you earned less than $14,820 ($20,330 if married filing jointly).

To learn more about how the 2015 tax year will affect your income tax planning, contact us at McRuer CPAs.

03/23/2015

Child and Dependent Care Tax Credit

If you paid someone to care for a person in your household last year so that you could work or look for work, you may qualify for the Child and Dependent Care Tax Credit.

Child care giverGenerally, to be eligible you must have paid someone to care for your children under age 13, or a dependent or a spouse who is physically or mentally incapable of self-care. You must also have earned income and, if married, your spouse must also have earned income.

The credit is worth between 20% and 35% of your allowable expenses depending upon the amount of your income.  Your allowable expenses are limited to $3,000 if you paid for the care of one qualifying person or up to $6,000 if you paid for the care of two or more.

You must include the name, address and taxpayer identification number of your care provider on your tax return.  Click here to read more information about this tax credit.

02/26/2013

Education Expense Relief

The new tax law package has some good news for families who are seeking tax relief for education expenses.

The American Opportunity Tax Credit, a refundable tax credit for undergraduate college expenses, has been expanded for another 5 years to 2017.  This credit provides up to $2,500 on the first $4,000 of qualified education expenses.

Holding booksCoverdell Education Savings Accounts (aka Education IRAs) have been made permanent and now allow higher contribution limits of $2,000 a year.  Money in these accounts grows tax-free and is tax-free when withdrawn if used for eligible education expenses. You can make 2012 contributions through April 15, 2013. 

The Lifetime Learning Credit is available for anyone who is taking a college course.  It allows a nonrefundable tax credit on eligible expenses even if you are only taking one class.  Parents or the student may be able to claim up to $2,000 of qualified expenses.  There is no limit on the number of years the credit can be claimed. 

10/10/2012

What To Do with the Money of the Rich

Eleven more billionaires have signed Bill Gates and Warren Buffet’s Giving Pledge, promising publically to give away half their wealth before they die.

Manoj Bhargava, founder of 5-Hour Energy drink; Reed Hastings, Chief Executive Officer of Netflix; Gordon Moore, co-founder of Intel Corporation; and Mark Zuckerberg, founder of Facebook all are onboard to influence and attempt to increase charitable giving while they still have a voice in the distribution of their wealth.

Richie-rich


Other wealthy chief executive officers have declined because they are awaiting proof that the Giving Pledge is bringing additional money to causes benefitting the neediest people – as opposed to trusts for the children of the wealthy.

Marc Benioff, founder of Salesforce.com, declined to sign the pledge and donated $100 million to a children’s hospital of his choice. German shipping billionaire, Peter Kramer, questions the power of the super-wealthy shaping issues of public concern such as education and prefers a democratic dialogue that includes government over a private committee. 

Since Gates and Buffet started the effort in 2010, total estimated charitable giving has increased four percent and giving by foundations increased 1.8 percent.*

 

*SOURCE;  Giving USA Foundation.

02/17/2012

Claiming a Child as a Dependent

As you gather your records to complete your tax filing for 2011, you may be among the nearly 55% of all taxpayers who will declare a child as a dependent.  Many children today have grandparents, uncles and aunts, step-parents and adoptive parents who are their primary caregiver and who may claim them as a dependent for a bit of tax relief. 

But there are a number of things to consider before making the claim. 

This is especially important if a child splits their time living with parents in different locations.  For you to claim a child on your tax records as a dependent, the IRS requires that child and you to qualify in five key areas called “tests”. 

The 5 tests for a Qualifying Child that you must consider are:

  1. Relationship
  2. Age
  3. Residency
  4. Support
  5. Joint return

But things aren’t as simple as 1-2-3-4-5.  Even the age of the child that you can claim has a few twists.  For example, a child living with you who is under the age of 19 at the end of the year, that is, December 31st, can be claimed as a dependent as long as you have determined that the child is related to you, a permanent resident, receiving primary care from you and/or is not being claimed by someone else on a separate return.  Whew!  If they are a full-time student they may be claimed if they are under the age of 24, but there are particular qualifications that must be met regarding the kind of education the child is enrolled in.

Having a CPA on your side to consider all the information is key to making certain you receive the tax relief you qualify for and pay only the taxes you owe.   For more information, contact us at McRuer CPAs for a consultation. 

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