MERRY CHRISTMAS!

While I think the tax filing season is the most wonderful time of the year - this is a close second!

WISHING YOU A MERRY CHRISTMAS!

From The Wandering Tax Pro and Turbo

PLENTY OF QUESTIONS

Implementation of The Tax Cuts and Jobs Act changes to tax law certainly raises a multitude of questions for tax professionals.

(1) As I previously discussed in “A Nightmare on Tax Street”, will the Form 1098 form to report mortgage interest be revised and will additional recordkeeping requirements be placed on bank and mortgage companies? 

Will existing IRS regulations on acquisition debt and home equity debt – treatment of closing costs of refinancing included in principle, application of payments of principle on consolidated mortgages, etc. - remain, or will new ones be written?

(2) What about the revised dreaded Alternative Minimum Tax (AMT)?  The exemptions and exemption phase-out ranges have been changed, but I have read of no change to the “preferences”, other than because miscellaneous expenses subject to the 2% of AGI threshold are no longer deductible on Schedule A this will no longer be a preference. 

In the “old” AMT personal exemptions were a tax preference, and not deductible in calculating Alternative Minimum Taxable Income.  And the Child Tax Credit is allowed as a credit against AMT.  We will no longer have a personal exemption deduction – this deduction is replaced by an increased Child Tax Credit and a new “non-child” dependent credit.  Will the enhanced and new credit be allowed in full as a credit against AMT?

(3) How will the new Schedule A report the specific components of real estate taxes and state and local income or sales taxes that make up the $10,000 maximum if this maximum is applied?  This information will be important in determining if any portion of state tax refunds are includable in taxable income in the subsequent year. 

I would think the first line in the tax section of Schedule A would be to identify real estate taxes paid, up to the $10, 000 maximum.  A second line would report either state and local income taxes or state and local sales taxes allowed (with a box check like on the current Schedule A), up to the combined maximum, if the property taxes paid are less than $10,000. 

(4) We know that the 20% deduction of “pass-through” business income will not be deducted directly on Schedules C or E or as an “adjustment to income” to reduce AGI, but will be deducted from AGI to determine net taxable income.  But will this deduction also be applied in determining “net earnings from self-employment” subject to the self-employment tax.

And the list goes on.

With a law written and passed in such a hurry there will be lots of issues that will need to be addressed, many in additional “Technical Corrections” legislation.

TAFN

WHAT IS CONSIDERED PREPAID INCOME TAXES?

I am sure you have been, and will be, getting emails and phone calls from 1040 clients asking if they can prepay their 2018 taxes to claim a 2017 deduction, considering the potential $10,000 limitation on the deduction for 2018.

The conference bill specifically states that "an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017."

So, it appears you can deduct prepaid real estate taxes, but not prepaid income tax. 

What exactly is prepaid state income tax? 

The actual amount of state income tax liability is based on the information on the final 2017 tax return – and will not be known until 2018.  The amount of state income tax withheld is based on the state withholding tax tables and a person’s W-2 wage income. 

And for the most part quarterly state estimated tax payments are based on either the prior year’s liability or the current year’s anticipated income.  The 4^th quarter 2017 payment is not due until mid-January of 2018; is making this payment in December of 2017 considered to be a “prepayment”, even though the tax payment is being made for 2017 income?

Obviously, if your normal 4^th quarter payment would be $2,000 but you send a payment of $10,000 in December you are making a prepayment of 2018 taxes.  But what about the normal $2,000 payment.  And if you do not make quarterly estimated state tax payments, having your anticipated state tax liability covered in full by withholding, but you make a 4^th quarter 2017 estimated tax payment of $5,000 in December, this $5,000 is clearly a prepayment.

What about a person who can control his state tax withholding in real time, like a sub-S business owner who pays himself a year-end bonus in December?  He or she can have an excessive amount of state income tax withheld from the bonus paycheck, which would, to me, clearly be a prepayment.  But what if that person anticipates excessive year-end dividends and capital gain distributions?  This could also apply to the person making only a 4^th quarter state payment.  These amounts are often not known until January when the December brokerage statements arrive.  As with anything, specific facts and circumstances would, or should, apply.    

Of course, if a person substantially overpays his or her state income tax for 2017 by whatever method he or she is only temporarily postponing paying federal income tax.  The resulting refund of excessive withholding or estimated payments would be included in taxable income on the 2018 return – although this money would be taxed at a slightly lower tax rate, and the taxpayer would get the potential benefit of the money earned on the deferred taxes if properly invested.

Any thoughts on the question?

TAFN 

BACK ON THE SOAPBOX

It seems to me that the underlying reason for the existence of any labor or trade union, or professional membership organization like the AICPA, is to get as many benefits as possible, financial and otherwise, for, and lobby to protect, its membership – regardless of whether or not the benefits and lobbying are appropriate, or whether or not providing the benefits, or what they lobby for, does harm or damage, financial or otherwise, to any other party or parties.  Their existence is purely selfish in nature– as I guess it should be.

For example, the actions and lobbying of the AICPA is solely for the purpose of lining the pockets of, and reducing competition for, their CPA members.  They don’t care if what they lobby for is morally or ethically “correct” or “appropriate”, or if what they want comes at the expense of, or does harm to, non-CPA groups and individuals.  They are not interested in proper tax administration, or what is in the best interests of individual and taxpayers.  They only care what is in the best interests of CPAs, and act accordingly.

Case in point – the AICPA opposes anything that gives additional credibility to Enrolled Agents or to “unenrolled” tax preparers.  If they oppose tax preparer regulation it is because they do not want taxpayers to think non-CPA preparers who receive IRS “approval” or credentials are as good as, or closer to reality better than, CPA tax preparers.  They think they “own” the tax preparation profession and want to keep it that way.  When they do support any regulation of preparers they expect to be exempt from its requirements.

While Enrolled Agents do have the National Association of Enrolled Agents to promote and protect members, and lobby on the behalf of members, more ethically and appropriately than the AICPA, “unenrolled” preparers do not have an equivalent of AICPA or NAEA. 

There is NATP and NSTP – but these organizations are geared more for providing quality education and resources for members.  While they do speak to legislation and IRS issues occasionally on a basic level, and do promote their members, they do NOT act affirmatively to protect members via aggressive lobbying against legislation and government rules and regulations that adversely affect members.

Unenrolled tax preparers, or more to point non-CPA members of the tax preparation industry, truly need a loud and aggressive voice in Washington

But I see a lobbying organization for tax preparers representing the interests of ALL preparers - EAs, the “unenrolled” and CPAs, actually all PTIN-holders - and dealing with the concerns that are common to all preparers.  Unlike the AICPA, this organization would not attempt to portray that one class of preparer – the unenrolled and/or the Enrolled Agent – is “more better” than another – the CPA.  The competence and appropriateness of a tax preparer should be determined and judged on the combination of the specific qualities and qualifications – knowledge, training, experience, remaining current, pricing and practices - of the individual preparer. 

Its purpose would NOT be to promote tax preparers, or one class of tax preparer, in the eyes of the public, but to protect ALL tax return preparers from the imposition of excessive and inappropriate rules and regulations by Congress and the IRS.

Your thoughts?

TAFN

IS A PUZZLEMENT

As you all know by now, in the wee hours of Saturday morning the Senate approved its version of the “Tax Cuts and Jobs Act” by a vote of 51 to 49.  The Republicans were actually able to finally pass a bill in both the House and the Senate, despite the handicap of having arrogant idiot Donald T Rump in the White House!

FYI - see my post on "Making One Bill Out of Two" at TWTP.

This bill is not as good as the Republicans claim it is, and not as disastrous as the Democrats insist it is.  There is both good and bad in both the House and Senate versions of the bill.  

What is bad with ANY legislation at ANY time is rushing it through without proper intelligent review, research and discussion merely so the idiot in the White House, and the Republican Party, can claim a legislative victory (Trump really doesn’t give a rodent’s hind quarters what is actually in the bill – he just wants Congress to pass ANY bill so he looks good).  The “Affordable Care Act”, aka Obamacare, was similarly rushed through, with nobody actually reading in full the actual bill, to get an early victory for Obama – and, while like the tax reform bill it was based on a good concept, the actual legislation that passed was a mucking fess.

It is obvious that, despite what Trump tweeted in self-congratulation, the tax cuts for working families and the middle class in the bill is certainly not MASSIVE.  And let’s be perfectly clear - self-absorbed Trump truly gets a MASSIVE tax cut in this bill.

I look forward to seeing the final legislation that the conference committee will come up with.

One thing that has always confused me in both versions is the need to reduce the maximum tax rate on “pass-through” business income, which includes income reported by a sole proprietor on Schedule C.

Am I not seeing something?

Under current law corporations pay a maximum of 35% on corporate income, and when this income is passed to shareholders as dividends they pay a maximum of 20% in income tax and 3.8% in NIIT on the dividends. So, the income of a “C” corporation CAN be taxed at a maximum federal rate of 58.8%.

Pass-through business income is currently taxed at the business owners’ individual tax rate. It is not subject to NIIT. So, under current law the maximum federal tax on, for example, “S” corporation income is 39.6%. When you consider the phase-out of items affected by AGI the actual effective maximum rate may be a bit higher – but nowhere near 58.8% The purpose of pass-through treatment is to avoid the double-taxation of corporate income.

Partnership and sole proprietor income is also subject to the self-employment tax, but the W-2 salaries of corporate owners is subject to FICA tax. So this is not included in the above comparison.

So why does there need to be a reduction to the federal tax rate of pass-through business income?

All pass-through entities are not equal.  Owners of sub-S corporations must be paid a W-2 salary, taxed as a W-2 salary; the amount that is passed through on the K-1 is in full the equivalent of corporate dividends.  The “pass-through” income of sole proprietors and general partners is a combination of wage-equivalents and dividend-equivalents, but is currently taxed in full at ordinary income rates and subject in full to the self-employment tax.  And the deductions for health insurance and pension contributions for the self-employed sole proprietor and general partner do not reduce net earnings subject to the self-employment tax; they are treated as adjustments to income on the Form 1040.  These items are not subject to FICA tax for a corporate owner-employee.  It is the in the application of the self-employment tax that inequities exist. 

If nothing else, the pass-through rate changes add additional and unnecessary complexity to the mucking fess that is the Internal Revenue Code, and more unnecessary work and agita for us at tax time.

I would very much like to hear from fellow tax professionals on this issue.  You can send a comment to this blog or email me at rdftaxpro@yahoo.com.

TAFN