of The Tax Cuts and Jobs Act changes to tax law certainly raises a multitude of
questions for tax professionals.
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?
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
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.
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?
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.
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.
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
the list goes on.
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.
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.
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."
it appears you can deduct prepaid real estate taxes, but not prepaid
exactly is prepaid state income tax?
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.
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 4th 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
if your normal 4th 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 4th quarter 2017 estimated tax
payment of $5,000 in December, this $5,000 is clearly a prepayment.
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 4th 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.
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.
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.
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
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.
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.
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.
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!
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
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%.
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.
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
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
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 firstname.lastname@example.org.