A LITTLE THIS-A, A LITTLE THAT-A

+ For those of you who are members of NATP, I recently got the word from Cindy Hockenberry -

“The research team is ready and able to answer any question regarding the new tax law. Questions will be billed as research questions.”

+ I submitted my questions about the deduction for interest under the GOP Tax Act and learned, despite what I had thought, that the itemized deduction for investment interest is NOT gone.  It has survived the Act.  The NATP Research Department told me -

“Investment interest will continue to be reported on Form 4952 and carried to Schedule A, line 14, part of the interest you paid section.”

+ The GOP Tax Act totally did away with the itemized deduction for home equity interest.  There is no “grandfathering” of existing home equity debt.  This makes it truly vital for all homeowners with both new and existing mortgages to keep separate track of acquisition and home equity debt going back to day one of the purchase of the property. 

After having some items confirmed by the NATP Research Department I am just about ready to “go to press” with my revised “Mortgage Interest Guide” and a special report on deducting mortgage interest under the GOP Tax Act for my clients.  Both of these include my worksheets for keeping separate track of acquisition and home equity debt and a detailed example. 

Reprint rights to both of these items will be available for fellow tax professionals to give to clients for ONLY $24.95.  Members of NATP receive a 25% discount – so the cost is only $18.70.

I will email you a pdf copy of these reports for your review if you email me t rdftaxpro@yahoo.com with SAMPLE MORTGAGE REPORTS in the “subject line”.

The reports will be delivered as a “word doc” email attachment.  The signed reprint rights agreement will be sent via postal mail.  Send your check or money order, payable to TAXES AND ACCOUNTING, INC, and your email AND postal address (and membership number if a NATP member) to –

TAXES AND ACCOUNTING, INC

MORTGAGE INTEREST GUIDES REPRINT RIGHTS

POST OFFICE BOX A

HAWLEY PA 18428 

+ The new IRC Section 199a Qualified Business Income Deduction is truly a convoluted mucking fess that adds much unnecessary complexity to the Tax Code.  Tony Nitti of FORBES.COM has tried to explain this new deduction here and here.

I have already received an email from a client asking if he should change from being an employee to an independent contractor to take advantage of this new loophole.  While this is a valid question, although one certainly cannot simply go from being an employee to being an independent contractor by just saying “make it so” and changing the method of payment, and one that needs to be answered now, I have neither the time, nor the desire, to properly “digest” this new deduction now, considering that I need to get ready for the upcoming tax filing season.

A request for my fellow tax professionals – I expect the IRS will no doubt create a detailed worksheet to make sense of the convoluted mess and properly calculate this deduction when it gets around to writing the instructions for the 2018 tax returns – much later this year.  But we need such a worksheet now.  Does anyone have, or has anyone seen or heard of, a Section 199a Deduction Worksheet that is available to download NOW, either free or at a minor charge?  If so, please email me at rdftaxpro@yahoo.com with SECTION 199a WORKSHEET in the “subject line” with the information. 

I will share the link or links to acquire such a worksheet in a subsequent post here.

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 

2017 YEAR-END TAX PLANNING - WHAT DO WE TELL OUR CLIENTS?

Around this time of year, we tax professionals usually send out year-end tax planning letters to clients.  But year-end tax planning is different this year, with the possibility of tax “reform” legislation being passed before the end of 2017.  And more so, with the additional possibility, although I think remote, that tax law changes could be made retroactive to 2017 instead of taking effect beginning with tax year 2018.

 

What do we tell our clients?

 

The traditional year-end tax plan of accelerating deductions and postponing income is especially applicable this year considering that the “framework” for tax reform calls for reducing tax rates, eliminating itemized deductions and increasing the standard deduction.

 

2017 may be the last year taxpayers can deduct taxes, medical expenses, and miscellaneous investment and job-related expenses.  So, making additional payments in these areas – such as making the 4^th Quarter estimated income tax payment in December 2017 instead of January 2018 and scheduling and paying for medical appointments, exams and treatment and paying job-related expenses before year end.  Of course, decisions should be made remembering the deductibility of medical and miscellaneous expenses is based on the 10% (now for everyone) and 2% of AGI exclusion. 

 

As we all know you can only deduct “itemizable” expenses if the total exceeds the applicable Standard Deduction.  While it appears that deductions for mortgage interest and charitable contributions will remain, the alleged “doubling” of the Standard Deduction could cause these expenses to provide no tax benefit in 2018 – so, if a taxpayer will be able to itemize for 2017 under current tax law, making an extra mortgage payment in December and making charitable contributions planned for 2018 in the last months of 2017 would be a good idea.

 

The “framework” does not give any indication if the current lower 0%, 15% and 20% tax rates for qualified dividends and long-term capital gains will remain in effect.  So, it is important for taxpayers to look at their investment activity for the year and their current portfolio and take maximum advantage of the lower capital gain rates, especially the 0% rate if applicable.  Taxpayers may want to consider selling stocks or mutual fund shares at a gain, and immediately buying them back, to lock in the lower tax rate on investment appreciation.  As we know, there is no “wash sale” limitations on sales that produce a net gain – only on transactions resulting in a tax loss.

 

And, as every year, we need to advise clients on year-end strategies concerning the sale of mutual fund shares related to the timing of year-end distributions and Net Asset Value changes, and college tuition and fee payments. 

 

FYI, the November issue of ROBERT D FLACH’S 1040 INSIGHTS includes my year-end planning recommendations.  A copy of this issue, sent as a pdf email attachment, is only $3.00.  Click here for details.

 

When the actual specific details of the framework’s “cocktail napkin scribblings” are finally released, sometime in November, we will have a better idea of what to recommend.  But we really cannot wait too long to send out the year-end planning letters and get our clients thinking about year-end moves. 

 

This year-end suspense regarding tax law has, unfortunately, become the norm in recent years.  Perhaps it would be a good idea to pass a law that requires tax legislation, other than emergency legislation relating to natural disasters and perhaps other unique situations, that would affect the following year (for example tax law affecting 2018 introduced in 2017) MUST be passed by August 31^st or September 30^th.  And one way to avoid late-year disaster-related tax legislation would be to make tax relief for “Presidentially-declared” natural disaster areas permanent.

 

So, what are your thoughts on this issue?

 

TAFN