Posts Tagged ‘tax planning’

Hacking Itemized Deductions

The Tax Cuts and Jobs Act enacted late last year opened a variety of opportunities for average people to reduce their tax burden. The biggest advantage of the tax cuts for individuals is the reduced tax rates and extension of income in the lower brackets. Itemized deductions also pay a serious role in how the changes in the code will affect your final results next spring.

Gaming the standard deduction was less of an issue in the past. Now, with the standard deduction at $24,000 for joint returns ($12,000 for single filers and $18,000 for head of household) there is ample opportunity to reduce your tax bill. Exemptions are gone so many will face higher taxes in this area. State and local taxes (SALT) are limited to $10,000 in 2018 – 2025. With the standard deduction so high and SALT limited to such a low level, most people will no longer need to itemize.

For every problem there is a solution. Today we will cover each deduction on Schedule A and look for alternatives. Pulling deductions from Schedule A (even if you don’t itemize) and deducting them elsewhere on the return is akin to legally double dipping. That is our mission. We want to have our cake and eat it too. If we play this right you should manage a big juicy standard deduction while deducting a large portion of each expense as well.




Medical and Dental Expenses

Medical expenses were always a high hurdle to overcome with the 7 ½% (10% in some cases in the past) of AGI reduction of qualified medical expenses. There are several ways to remove numbers from this section and deduct them elsewhere.

If you have a qualified medical plan you can contribute to a health savings account (HSA).

Your employer may offer a Health Reimbursement Arrangement (HRA). The employer sets the amount available to employees. Unused portions can be rolled into the following year if the employer allows. If unused funds are not allowed to roll to the next year it becomes a “use it or lose it” plan.

Certain restrictions exist for self-employed persons. People with a side gig/side hustle or small business can use a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). QSEHRAs require administration. The cost is minimal, but the rules complex enough that you will want professional help. My office recommends Take Command Health for administration. The tax savings are well worth it.

Employers may cover annual physicals and other medical expenses as an employment requirement. The cost is born by the employer and the employer also gets the deduction.

Investment property owners and those with self-employment income can also shift some medical expenses from Schedule A. Small business owners can deduct most medical insurance premiums on the front page of Form 1040 as an adjustment to income. A landlord who is hurt while working on an investment property will have a medical expenses related to the investment property and are therefore deductible against the rental income. A self-employed semi driver can shift medical expenses required to drive a commercial vehicle from Schedule A to the business part of the tax return.




State and Local Taxes (SALT)

This is the issue that started all the problems. There is a cap on SALT deductions of $10,000 from 2018 – 2025 unless Congress changes the code. Several high tax states have devised plans to work around the issue, shifting the expense to the charitable contributions line of Schedule A. The IRS nixed the idea and at least two states have sued. Because the IRS allowed similar schemes in the past when it involves college funding the court will have a serious consideration on its hands. When the issue clears up I’ll let you know.

The problem affects all states. The higher your income, the more likely this becomes an issue. Texas, a state with a reputation for low taxes is really a high tax state. The sales tax and property taxes more than offset the income tax free part of the Texas tax code.

We don’t have to wait for the courts to decide the outcome before we skin this cat. (My apologies to all the cat lovers of the world. For the record, my cat, Pinky, just clawed me in protest as I wrote this.) Property taxes can be partially shifted to an office in the home if you have a business or investment properties. The office in the home must be “regular and exclusive” and it is worth the effort to meet the tax code requirements.

Be sure to report personal property taxes related to a business or investment property on the appropriate form and not on Schedule A where it has limited value.

Interest You Paid

There is more incentive than ever to pay off the mortgage early. You can shift some of the mortgage interest to an office in the home as proffered above.

Investment interest has significantly reduced value under the new tax rules. Margin accounts should be avoided. They’re a bad idea to start with (buying investments with borrowed funds) and the deductibility of the expense is now also limited.




Gifts to Charity

There is some minor good news on charitable deductions. Cash donations were limited to 50% of AGI in the past with the remainder carried forward for up to five years. The deduction limit for cash is now increased to 60% of AGI.

Still, the goal is to reduce Schedule A to a nonevent on your tax return. If we reduce deductions to less than the new higher standard deduction we can, in effect, double dip.

I’ve published on this strategy in the past. The strategy is more powerful than ever under the new rules. Taxpayers with business income or investment properties can shift normal contributions to charity into promotional/advertizing expenses for the business.

It works like this. Instead of donating to the charity of your choice, ask the charity about any upcoming events and sponsor said events. Your business or rental properties get a nice plug in the brochures handed out at the event and probably a prominent display of your company logo and contact information. While this may not be the best way to grow a business, it is a powerful way to build community goodwill for your company! It’s also a business deduction. You can support your favorite charities and get a deduction, too.

Landlords need caution when applying this strategy. Deducting a $20,000 sponsorship when you only have one small duplex in the low rent side of town is unlikely to pass the sniff test! On the other hand, if you have five duplexes around town and you sponsor an event for $1,000, it probably falls within acceptable parameters. Landlords should have a business name: ABC Rental, LLC, for example. By having all your properties under one umbrella it allows the sponsorship to promote all your properties.

Casualty and Theft Losses

The Tax Cuts and Jobs Act eliminated casualty and theft loss deductions except for casualty losses in federally declared disaster areas. Even if you are in a federally declared disaster area, the first $100, plus 10% of AGI, doesn’t count. Example: If your AGI is $100,000, the first $10,100 of casualty losses in federally declared disaster areas doesn’t count.

There are few options if you suffer one of these losses. Business owners can deduct the loss as a business expense.

The loss/theft might qualify as a capital loss. This is a stretch for most situations, but you should be aware of the possibility in case it happens. Capital losses are reported on Schedule D where there are no restrictions like Schedule A. Schedule D losses are limited to $3,000 per year, plus all capital gains.

Casualty and theft losses are reduced by insurance coverage. If all or most of the loss is covered by insurance there is little or no opportunity to deduct expenses. More than ever, adequate insurance of assets is indicated.




Miscellaneous Expenses, Subject to 2%

Miscellaneous expenses, subject to 2% of AGI are eliminated for 2018 – 2025 under the current code. There are still a few planning opportunities for those who plan.

Unreimbursed employee expenses is the biggest issue in this section. It is important to have a serious discussion with your employer on your out-of-pocket work expenses. Your employer gets a full deduction on most of these expenses while you get nothing if they are not reimbursed! It might be worth a salary adjustment to make room for reimbursed expenses. Example: If you typically have $5,000 per year of work expenses, any salary reduction less than $5,000 with full reimbursement of work related expenses is a win for you and a nice tax deduction for the employer. Employers: this can be a valuable employee perk that pays both you and the employee. A true win/win.

Tax preparation fees are only deductible as they apply to the business or rental property portion of the return. A lot of accountants miss this. If your tax preparation fee is $500, a portion is for the personal part of your return (no longer deductible) and a portion is for the business (Schedule C and other related business forms) and rental property part of the return (Schedule E). Ask your accountant to break out the prep fee (required by the IRS to deduct). Your accountant can list $250, for example, as the portion of the prep fee attributed to the business portion of your personal tax return. This $250 can be deducted on the appropriate forms (Schedule C for small business, Schedule F for farms and Schedule E for income properties).

A safe deposit box used for business or income properties is deducted on their respective area of the return instead of Schedule A.

This section of Schedule A catches a lot of minor deductions. Think the deduction through before writing it off (pun intended). On Schedule A it is now worthless. But, if it is an expense related to a business or rental property . . .

Union dues are the remaining big item. I wish I had an answer. If any of you kind readers have a suggestion, let me know. Union dues are no longer deductible until the tax code changes or I figure out a work around. Don’t hold your breath.




Other Miscellaneous Deductions

This is the last section of deductions on Schedule A. These deductions are not reduced by 2% of AGI.

We will focus on the two most common items reported in this section: gambling losses and claim repayments.

Gambling losses are reportable on Schedule A up to gambling winnings. The best way to avoid tax problems is to stop gambling! The odds are against you. As budding accountants you know better. There, I said it. Now on with the show.

If you insist on gambling, at least keep a daily log of your results/sessions. You can use gambling sessions to remove losses attributable to gains in the same session on the front page of Form 1040. Most states follow federal on gambling sessions so the tax advantage stretches to the state return for most taxpayers.

Gambling sessions don’t remove all the losses from Schedule A, but it should shift a serious portion of the losses from Schedule A to the front page of 1040 where they have value. You can read more about gambling sessions here.

The other big item in this section of Schedule A is claim repayments. We are not talking about business or investment property repayment issues. Those are reported on their respective forms.

A common repayment is unemployment benefits. The claim repayments reported on this section of Schedule A are taxable items of income on a previous tax return. Repayments of items not reported as income on a prior return are not deductible.

We’ll use unemployment benefits as our example. Repayments made in the year the income was received is adjusted where the income is reported. Example: You receive $2,800 of unemployment benefits and are later required to repay $200 of the benefits. You repaid in the same year you received benefits. You adjust the reported $2,800 to $2,600. No itemizing required.

All claim repayments reported as income in a prior year under $3,000 must be reported on Schedule A. Repayments over $3,000 can also be reported on Schedule A, but you want to use an alternative method. There is a planning opportunity here.

For repayments over $3,000 you can calculate a credit for the repayment, reporting the credit on page 2 of Form 1040 (line 73 on the 2017 return). In the margin write 1341, to inform the IRS of the code section you are using for your right of claim.

You calculate the credit by going back to the return the income was reported on. Calculate the prior return without the income repaid in the current year. The reduction in tax is the credit.

Final Notes

I covered what I feel will be over 90% of the issues surrounding Schedule A and the available solutions for moving the deduction to another area of the return. This, in effect, allows a bit of double dipping. You still get the new, outsized standard deduction while still claiming a serious portion of the actual expenses.

Unfortunately, not everyone will benefit from these strategies. However, with the volume of options provided there should be at a least a few options available to most readers.

If you have any creative ideas to divert deductions from Schedule A to areas of the tax return where they have value I’d be happy to hear them.

Remember, an expense is worthless until you get a write-off.



Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you.

Stalking the Accountant: Tax Plan Now or Forever Hold Your Peace

Stalking humans.

A new tax guide arrived late last week: The Complete Analysis of the Tax Cuts and Jobs Act. It’s what I consider light reading on a Sunday afternoon.

Tax season is over, but tax planning is more important than ever with the new tax laws and changes. Consulting and planning with clients started May 1st and continues strong. I’m booked out until mid-July. If you own a business or investment properties you need to consider consulting with a tax professional to take full advantage of the new Qualified Business Income deduction.

One problem from earlier in the year has probably corrected itself. Withholding tables were adjusted in early February to account for the elimination of exemptions and the new tax brackets. The new tax tables overcompensated by under withholding. This meant people would pay less tax while getting a smaller refund or even owing! It was a timing issue of when you would actually pay your tax liability.

Mid-April brought revised updated withholding tables correcting the issues. Preliminary analysis of client files show the new tables handle around 60% of withholding correctly. The reason for the 40% error rate is the elimination of exemptions. The good news is that the withholding tends to err on the conservative side, creating slightly higher refunds than the original withholding tables.

It might pay to review your tax situation this year. The last decade or so had modest annual changes to the tax code. This year is radically different. New deductions, expanded tax credits and extended tax brackets created opportunities to reduce your tax liability if you plan properly. This extra money funneled into an index fund or reducing debt should have long-term positive affects to your wealth creation. You have a window of opportunity to reach financial independence and early retirement funded by the tax reductions.

All is not rosy. The limits placed on state and local tax deductions (SALT) coupled with the elimination of itemized deductions, subject to 2%, means some taxpayers will see a tax increase.

Contact me if you are interested in a consultation. Be sure to review Working with the Wealthy Accountant before hitting send.

I’ll need a copy of your 2017 tax return and a list of questions prior to our meeting so I can adequately prepare. Sometimes I can do more than just cut taxes. Several clients were able to reduce their expected larger refund and funnel it into a Capital One 360 or similar savings account where the interest on the lowered withholding will exceed my fee. Each situation is different so I need your information to provide the best advice. Keep in mind I consult on Tuesdays and Thursdays each week only. I sometimes open another day, but I do have other obligations consuming my time.

Winner’s Circle

We have three winners since the last Stalking installment. Gretchen D of Birmingham, Terry C of Dallas and Cindy M of Rapid City, SD saw some Amazon gift card love slide their way.




What I’m Reading

Bill Gates contacted me the other day to share a book he found interesting. He is well aware of my love for good books and was excited to share another gem. The conversation went something like this:

Bill: Hey, Accountant guy! I have an awesome novel you must read.

Accountant Guy: Bill, you know I don’t read many novels anymore. It better be darn good to break me away from my regular science and financial planning books.

Bill: Trust me! You’re going to love this book.

So I dragged my feet for a year before I decided I needed a comfortable summer novel to disappear into. Enter Neal Stephenson’s Seveneves.

Anyone for some light reading. The book only cost your favorite accountant $85.

Seveneves starts with the moon blowing up. The book alludes that it might have been a micro black hole racing through our neck of the galaxy. Regardless, people didn’t know what caused the catastrophe. The event split the moon into several large pieces. A few days later the first two large pieces smashed as gravity brought the pieces back together, creating smaller pieces. Scientists realized the collisions would continue breaking the moon into smaller debris. It also meant a large amount of moon debris would eventually hit the Earth.

Mankind has two years to get to space if it wanted to survive. The International Space Station was the beginning building block of a larger space habitat. A few thousand people were brought to space to wait out the Hard Rain that would turn Earth into a boiling inferno where no life could survive. To keep the Ark manageable, DNA and DNA data were transported to the Ark.

Space is unforgiving. The Hard Rain came and the Earth was destroyed. A safe haven was finally achieved by the Ark with one problem: only eight women were left alive. One woman had reached menopause. The seven Eves were all that remained of the human race and its hope for a future. The human race was all but extinct. These seven women would use technology brought from Old Earth to bring humanity back from the abyss.

The novel picks up 5,000 years later when Earth is ready for life again. I don’t want to spoil it for you so I’ll stop here.

Seveneves is hard to put down. It isn’t light reading either, as I teased at the open of this section. It is classified as hard science fiction, something I do enjoy. If you want a solid novel to fill a few sunny afternoons or early evenings, consider Seveneves. It’s worth your time.



Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you.

SPECIAL SALES TAX REBATE ALERT! for Wisconsin Taxpayers

Wisconsin announced a special one-time $100 (per child) sales tax rebate. It seems the state treasury is overflowing so the legislature decided to get the money divested as soon as possible. This rebate applies to 2017 tax returns!

It is unlikely tax preparers will notify clients since the cost of doing so will exceed the income derived from the work brought in. This article will outline the simple steps necessary to claim your sales tax rebate.

If you have dependent children you probably qualify for the rebate. But, you can only claim the refund from May 15th through July 2nd! After July 2nd the rebate is lost if you haven’t applied by then. You can’t apply before May 15th either as the website only contains program details prior to May 15th.

Who Qualifies?

The sales tax rebate is for sales and use tax paid in 2017 for raising a dependent child. Only one person can claim the rebate! No recordkeeping of actual sales taxes paid is required.

If you claimed a dependent on your 2017 Wisconsin tax return, the dependent was under age 18 on December 31, 2017, is a Wisconsin resident and U.S. citizen, you meet the eligibility requirements for the rebate.

The rebate is $100 per qualified child.

There are two ways to claim your rebate from May 15th through July 2nd:

  • You can call 608-266-5437 Monday – Friday (excluding holidays) from 7:45 a.m. to 4:30 p.m. or,
  • Apply via the internet at https://childtaxrebate.wi.gov.

Note the website only has program details until May 15th when they go live. I’ll add screen shots and a step-by-step guide to this post if it looks like people are having problems claiming their rebate.

When applying for the rebate, have your 2017 tax return handy. Verify you claimed/are able to claim the child/children on your 2017 tax return.

Wisconsin did not provide a timeline for release of funds, but in the past Wisconsin has issued refunds in 8 weeks or less.

Please share this with Wisconsin friends and family. If you have a blog, share with your readers if any are from Wisconsin. Share this page (or the information thereon) on your social media pages.




Final Note

My office will handle rebate requests for clients if they contact my office. Non-clients can also call my office to have us handle the request for rebate as time permits. Since the rebate amount is small I will only ask a donation amount of your choice. All proceeds will go to charity. I’ll update the charities supported on a future Saturday edition of “Stalking the Accountant”.

Stay tuned.

 

Wealth Building Resources

Personal Finance is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Finance is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to skyrocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon good way to control costs and comparison shop. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you.

 



Filing Status When You Can’t Find Your Spouse

Determining your tax filing status can be tricky at times. I see the same questions on social media and a few times per year in my office where people are confused on what filing status to use when they are estranged from their spouse. On the tax subgroup in Reddit the question popped up a few times this tax season already and with two new clients in the past week.

I included a decision tree to help you determine your filing status. However, there are details that didn’t fit within the decision tree neatly so it is important to read the text of this post to assure you are using the correct filing status.

There are several reasons when you may want to consider filing a separate return from your spouse. In rare instances your combined tax liability is smaller. Example: spouses have widely different incomes and one spouse has a very large uninsured medical expense.

A more important reason to file a separate from your spouse is if you suspect malfeasance. If you file a joint return and your spouse under reports income and/or overstates deductions and/or credits you are liable for the tax debt if the IRS discovers the irregularities.  The only way to sever liability on a joint return is if you signed under threat or duress. Threat or duress is very hard to prove and the IRS has a history of denying relief when there are no reports of abuse to law enforcement.




The final reason to file a separate return is because you have no choice because you don’t know where your spouse is. This is more common than you think. The Reddit subgroup above has similar questions every tax season. As mentioned, two new clients had this issue in my office in the past week.

If you can’t find your spouse or she/he refuses to file a joint return, you have limited options. The decision tree in this post is an easy way to visualize your choices. In short, if you lived with your spouse at any time in the last six months of the year you must file either a joint or married filling separate return. If you lived apart the last six months of the year and provide more than half the support for yourself and child you can file as head of household. Where no children are involved you are limited to MFJ or MFS. If you are legally separated or the divorce is final you can file as single. You will need the services of a competent attorney if you can’t find your spouse to facilitate a legal separation or divorce proceedings.

There are tremendous negatives to filing a MFS return. Many credit are lost (earned income credit, adoption credit and child and dependent care credit are a few). Education credits and the student loan interest deduction are unavailable on a MFS return. If you own income property the passive activity loss limit is reduced to $12,500 ($0 if you lived with your spouse at any time during the year).

If your spouse itemizes on a MFS return you MUST also itemize, regardless if you have any Schedule A deductions or not. If you can’t find your spouse or he refuses to communicate with you, you will not know if he itemizes so you may have no choice other than to itemize.

You report only your income and deductions on a MFS return unless you live in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA and WI). In community property states you report half the community property income and deductions. If income and deductions are not reported to the other spouse the benefits of community property law can be lost. Community property laws can be circumvented fairly easy if the taxpayers live apart.

Let’s review the decision tree and review the notes that follow.

Use the decision tree to determine your filing status. Use the notes below for further explanation of special situations.

Notes to the decision tree: If your spouse died during the year you can still file a joint return for the current year. If you paid over half the costs of keeping a home with dependent child you can file as a qualifying widow/er for the two years following the death of your spouse. A qualifying widow/er enjoys the same advantages of a MFJ return.

Temporary absences for education or military service do not count as living apart.

If you sign a release of exemption as a custodial parent and would otherwise be allowed the dependent exemption you can file as head of household if you lived apart from your spouse the last six months of the year.

A parent does not have to live with you to claim the exemption if you provided more than half the cost of keeping the parent’s home for the entire year.

 

The simplest part of the tax return can become a confused mess when unique situations make an appearance. The raw number of requests involving a missing spouse required me to publish on the subject.

If you have additional questions leave a note in the comments. I’ll try my best to answer questions promptly. During tax season and when on vacation I’ll need more time to respond.



Problem Discovered in Tax Bill Will Leave Many Owing the IRS Big Next Year

It’s going to be a cold winter next tax season if people don’t prepare for the antics of Congress and the IRS.

A major tax bill late in the year followed by a bill of extenders February 9th and we have the perfect recipe for problems.

My initial reaction to the tax bill in December was that most of my clients would see some benefit since my clients tend towards the upper end of the income scale. I also have lower income and older clients who are not benefiting as I expected. Certain taxpayers are even seeing a tax increase, most notably, those with large unreimbursed employee business expenses like on-the-road sales people and rock band members.

The tax software used in my office estimates what the new tax rules will mean for clients if the rules applied to their 2017 return. This has been a powerful planning tool early in the tax season. But as an accountant I always look under the hood and when I did found a disturbing problem.




From Joy to Tears

Taxes cause pain in two ways. First, the actual tax dings the household budget. Second, if not properly prepared for the changes, the timing of when the remaining taxes are paid can cause exquisite pain.

Adding to the mess, the IRS didn’t have time to update withholding tables until the end of January. Most clients didn’t see a change in their paycheck reflecting the new tax law until their first paycheck in February.

Also problematic is the issue of exemptions. For this calendar year personal exemptions are eliminated while the standard deduction is increased. As expected, this change was a big yawn for most clients. A few were able to capitalize on this particular change.

Without exemptions it is harder for the IRS to estimate the tax liability of household size. Yes, the child tax credit has been increased and the phase-out level pushed higher, but the age of the child and if they attend college now plays a bigger role than in the past.

Late January and early February tax returns delivered in my office presented our estimate of how the tax change will affect the client. A few people saw a tax increase, but most had either a small change or a larger refund.

One thing bothered me as we shared the news. I worried how the updated withholding tables would affect my results. I warned clients my estimate assumed everything was exactly the same as their 2017 return when we know the updated withholding tables would mess with my estimate.

Now that we are on the backside of February and most clients picking up in the last week have seen a paycheck with the new withholding, I can ask an additional question: How much did your paycheck change with the new withholding?

I expected a modest adjustment to my software’s estimate. What I got made me light-headed.

Every single client I met in the last week or so with a new withholding amount is under withholding by a large margin! People expecting a $3,000 reduction in their tax bill are seeing a $4,000 or more reduction in withholding. Clients who already owe money or like to keep it close to breakeven are in for a rude surprise if I don’t intervene.




An Imperfect Solution

I have a solution to fix the problem, but it entails a lot of screwing around. You can either reduce your exemptions on your W-4 or fill in an extra amount to be withheld each pay period above the withholding table amounts.

Unfortunately, most people don’t have a clue what is about to hit them. If their accountant doesn’t figure this out fast they will be steamrolled next tax season when the miscalculation bites. DIYers are at greatest risk as they tend to believe what the computer tells them. Computers are great for grunt level computing in preparing a tax return, but ill equipped to fix this new problem.

Here is what I consider the only appropriate option. When tax season is over you need to speak with a tax professional that is willing to crunch the numbers by hand to adjust for the tax and withholding changes. There is no other way.

My guess is online programs will become available as the year goes on. It still requires taxpayers to understand they even have a problem.

A Busy Off Tax Season

Tax professionals will be busy this year. I can’t imagine 140 million people are going to show up at the tax office this summer. First, many tax offices close or have reduced staff over the summer, and second, tax offices will focus on their regular clients if they address the issue at all. About half of taxpayers prepare their own return. Next spring, after the mid-term elections, taxpayer will have a hangover from the antics of Congress and the IRS. The reduced refunds and increased balance dues could chill the economy. (At least the guys who created the mess got re-elected. Man, if they lost their cushy government jobs they’d be unemployable, except as lobbyists.)

Prepare your own taxes and support your favorite blog at the same time. What could be better?

Your favorite accountant already has a plan. Originally I planned on reviewing all returns in my office with a business or income property. If we find an issue we’d give the client call to set up a meeting. This has been expanded to all clients! I estimate I’ll communicate with 600-700 clients over the summer out of a book approaching 1,000.

Readers of this blog will also feel uneasy as my discovery is copied by other news outlets. (Note to news outlets: Let your readers know where you learned this nugget of information as a gift to a wayward accountant from Backwoods, Wisconsin.) My regular clients have preference. Openings in my schedule are available to non-clients. That means most of you, kind readers.

It’s nothing personal. I have to focus my time as it will be at a premium this year. The amount of tax planning necessary this year will trump (pun intended) anything I’ve experienced in my 36 year career. The business income deduction alone would be enough for a comfortably busy summer. All these extra issues will overwhelm any tax office brave enough to remain open after April 17th.

I’m not bailing on you guys! Normally I block one day per week for consulting. This year I will open two days per week with the option some weeks for a third day. Keep in mind consulting takes prep work before we speak. I need to see your 2017 return and any expected changes.

To make this work will require specialized training in my office so I’m not a lone soldier. As a lone wolf I’d never make it through my client list, not even considering even one non-client from my list of awesome readers.

Late April will be a recovery period as I train and take some time with family. Clients reading this can set a summer appointment already. Some have. Clients picking up from now to the end of tax season will be reviewed for a summer appointment.

From May 1st on it will be full speed forward with consulting and tax planning. Clients with a business and landlords really need to make it a priority to see me this summer or fall.




How Much of My Tax Savings are Going to You, Mister Accountant?

And then we get to fees. In my office I will charge a flat $50 for clients to have their withholding reviewed. Before you pay me a cent (or I do a stitch of work) I’ll pull up your file to determine if a review is warranted. If it makes sense for me to review your records I will. If it is obvious you don’t have a tax issue I’ll inform you so you can save fifty bucks. Retired persons and those with low income generally fall into this group.

Businesses and landlords all require a review this year no matter what! There are too many additional moving parts to abscond a detailed review. My hourly fee will apply. I doubt anyone will lose on the deal as the advantages this year will far exceed anything you pay me (or most other accountants).

All non-client reviews are based on my hourly rate of $275 per hour. Regular clients have an advantage since I already know their tax situation and have their return on file. I need more review time with non-clients to acquaint myself with their tax situation.

I encourage you to begin a dialog with a tax professional early this year due to higher demand on their services. Your withholding is almost certainly wrong and to the government’s benefit. If you never consulted with a tax pro this is the one year you might want to consider it anyway.

I can see all your hands up. Yes, I will handle as many as humanly possible. However, I have a strong feeling my larger public presence will crimp the percentage of non-clients I can accept compared to demand.

The forum on this blog and Mr. Money Mustache are a great resource if you don’t have a tax professional on speed dial. I also expect many local accounting firms to add hours to handle the extra consulting this year.

Finally, you are welcome to contact me for consulting, a review and/or to prepare your return. I recommend you read the Working with the Wealthy Accountant page before hitting the Contact button.



How and When to File a Superseding Tax Return

There is no question the tax code is massive. No matter how knowledgeable or experienced you are, mistakes will happen. The consequences of such mistakes can be minor or they can cost serious amounts of additional tax, interest and penalties.

Filing an amended return is your only option after the due date, including extensions. An amended return solves most problems. Interest and penalties may apply. In some cases even an amended return can’t fix an error; you could lose entire deductions forever.

The number of elections available is large. Some are irrevocable. Making, or failing to make, an election is set in stone in some cases with the original return. Failure to check one little box can cost you a large deduction permanently.

A superseding return may be the only option if you file it on time.




Amended or Superseding Return

A superseding tax return incorporates the new information into the original tax return if filed by the due date, including extensions. 

A superseding return is filed after a subsequent return and before the due date, plus extensions. (That was worth repeating.) The second return is a superseding return. A superseding return it generally treated as the original return, incorporating the new information and modifying (superseding) the earlier return.

Here is a small example where a superseding return is valuable tool.

A common error involves the Section 1.263(a)-1(f) de minimis safe harbor election. Most tax professionals (and readers of this blog) know they can deduct assets up to $2,500 rather than depreciate these expenses over a number of years if they make the appropriate election. The election is required every year. (The IRS says the election must be made “timely”. I take this to mean the election must be made on an original return filed by the due date, plus extensions. A late filed return may not allow the election.) The election is irrevocable.

In my office we automatically make this election for all returns with rental properties or a small business. (All corporate and partnerships returns also automatically get the election.)

Making the safe harbor election covers items a client may have neglected to inform the tax preparer of. If the election is made and not necessary, no harm done. If the election is necessary and forgotten, serious potential harm exists.

 

The IRS is less than clear when it comes to superseding returns. Corporations (S-corps, too) have a nifty box to check when e-filing a superseding return. Only corporations can electronically file a superseding return. Be sure to check the appropriate box or the IRS will probably reject the return as duplicate.

There are IRS instructions on when a superseding return must be filed on an individual income tax return. Unfortunately there are no instructions how to do it!

Superseding personal returns MUST be paper filed. Some tax professionals prefer filing a superseding personal return in the format of an original return and writing “SUPERSEDING RETURN” across the top of the first page. Because this will probably be flagged as a duplicate return another method is advised.

A superseding personal return should be prepared as an amended return on Form 1040X. (There is no superseding box to check.) All amended personal returns filed before the due date, including extensions, are automatically treated as superseding, incorporating the new data and modifying the original return. This means a forgotten irrevocable election CAN be made and is treated as if made on the originally filed return.

If a superseding return is filed before the due date (without consideration for extensions) interest and penalties are also avoided.

Amended returns filed after the due date, including extensions, are not incorporated into the original return. A required “timely” election is not allowed at this point.




In English, What Does This Mean?

The concept is short and simple, but often forgotten. A business owner may discover forgotten deductions for her business return when filing her personal return. The superseding return is a simple and fast solution for a previously filed corporate return. Add the new data, check the box marking the return as superseding and electronically file.

Individuals file an amended return for the same result, which must be mailed.

It sounds like a minor issue. When I review returns from outside my firm I need a powerful tool to make changes, especially when elections are involved. The tax code doesn’t automatically grant you preferred treatment. Special treatment must be requested in writing. Many elections are irrevocable. Many elections are required on an originally return filed by the due date, including extensions.

In English, filing an amended return before the due date (including extensions) on a personal return supersedes the originally filed return and solves most election issues. You can add a forgotten election if you catch it in time. Waiting for the IRS letter is too late. Consider the superseding return an amended return with a really tight due date, allowing you full sway in how the original return looks. It also eliminates or reduces interest and penalties.



Stalking the Accountant for Sport

It’s been an exciting week in the accounting world. The first full week of the traditional tax season is in the books with nine more left to go. As far as I can tell there have been no casualties.

Your favorite accountant is happy to report this is the smoothest tax season in years in his office. Three or four years ago I met Mr. Money Mustache and he put me on the map (Thank you, Pete!) it created a deluge of demand I was ill prepared to handle. The problem was I had no idea what I was getting into. Those problems seem to be fully resolved.

The added challenges nearly killed my practice. I had to learn new skills PDQ if I wanted to survive. Hiring more employees was a problem since nobody local had experience in what I was going through.

But, I am proud to say after several mental cramps I turned the corner. New policies and massive increases in technology have the office humming like a well oiled machine with stress reduced to a minimum. I’ll let you know if the psychosis returns.

Until then . . . I’m feeling much better now.

The smooth operation of our tax functions means I am still accepting new clients selectively. The bottleneck now is in processing the requests. To that end I hired a new team member to help with the follow-up of requests.

If you sent a request in the last few months without a response you should resend the request. Please include your phone number. Most do not. Amy will send an email with a follow-up phone call if we feel it’s a good fit.

The reason for the additional screening is to make sure it works for all parties involved. Sometimes expectations are different from what we can handle with our current structure. I’d rather discover early if there is a conflict or issues before we start. This is easier on both of us.

Don’t feel bad if you don’t get in. My team has managed to get things running smooth again after I overwhelmed the machinery. To keep it smooth we have to make sure we can do the job right.




Another Tax Bill

When you were looking the other way Congress passed another tax bill Friday. Yes, as in yesterday if you’re reading this the day I published.

The hoopla about the latest government shutdown was resolved with a major spending bill with lots of tax nuggets.

Here is why the spending bill is so important. The tax part of the bill retroactively renewed many expired tax provisions! This means many of the returns filed early are wrong!

The IRS is busting heinie to implement the changes. My software provider will update as soon as the IRS has their end fixed and ready to accept returns with the updates.

Here are some of the more common changes:

  • Mortgage insurance premiums are back and will be the number one reason we will need to amend.
  • Discharged mortgage debt is excluded from income again.
  • The provision to deduct education expenses (qualified tuition and related expenses) up to $4,000 above-the-line is restored.

The remainder of the thirty or so renewed provisions generally affect businesses.

Because the IRS will need time to implement these changes you either have to wait to file (including possible filing an extension) or filing now and amending later. It’s your call.

 

I kindly ask readers to spread the word on the DIY tax software offered by 1040.com. This is the same software I use in my office. If you use the link on this page it supports your favorite blog.

This is a project close to my heart and means a lot. Thank you for considering the option. Many returns also qualify for free-file.

 

Remember we have a drawing for two cash giveaways next week Wednesday. Details are available on the Where Am I page. Be sure to open those emails with the latest TWA post to win!

 

Now let’s have some fun!




What I’m Reading

Every year at this time I make myself a promise as I head to the office each day that I will take an hour or two to read. This year, as in past years, the promise is unfulfilled.

I still read some early in the morning and at night after writing if I can keep my eyes open. The weekends are nirvana!

This week I worked on a book in progress, but mostly read from The Daily Stoic by Ryan Holiday.

When I need to perform at my best I always look to my Stoic literature. If you don’t keep a copy of The Daily Stoic next to your bed you don’t know what you’re missing.



What I’m Watching

Just as time is tight for reading, time spent watching videos is also curtailed. As important as learning and relaxation are, tax season is a time when accountants sacrifice some of these hedonic pleasures.

SpaceX launched their Falcon Heavy Rocket this week and I watched it live from my desk. It was the coolest thing ever! Enjoy if you haven’t already.

 

I also watched a few videos in the vein of the selection provided here. Mysteries intrigue me even if they are somewhat contrived. Old stuff grabs my attention hard. Here we see mysterious monuments from around the world.




What I’m Listening To

My listening tastes turn unique during these intense times. I think you’ll enjoy Beethoven’s Symphony 7 selection. The calming sound emanated from my office more than once this week.

 

When the coffee started to wear off I got silly. Something to break up the classical sounds.

 

Finally, as you read this your favorite accountant is probably sleeping it off or reading voraciously with drool running from the left side of his mouth.

I’m also planning a special post for Monday. We have enjoyed p/e ratios in the upper teens, 20s and higher on the broad indexes for so long people forget it wasn’t that long ago when the S&P sported a single digit p/e ratio and the average stock in the index threw off over a 6% dividend yield with many sporting even higher payouts!

Monday we will discuss what would need to happen to go back to those days of the late 1970s and early 1980s and the late 1940s and early 1950s. It’s been a while since we enjoyed such a market. I promise an engaging read.

Won’t you join me.



Preliminary Report on Estimated Tax Savings with the New Tax Law

Tax season is still early in the tooth but patterns are starting to emerge.

My software allows me to use current year data to estimate results based on the Tax Cuts and Jobs Act changes. With a couple hundred returns under the belt already the impact of the changes are mostly expected with a few surprises thrown in.

Since planning will be so important this year I wanted to share my findings. Please understand these are estimated results. Several factors are hard to nail down in these estimates as the accounting industry is still deciding how to handle certain issues and the IRS still has to write regulations interpreting the changes.

One of the biggest issues not accounted for is the business income deduction as it is adjusted for guaranteed payments to partners and reasonable compensation to S corporation owners. If you aren’t familiar with these terms you can still benefit from my early findings.




Expected Results

Some results were expected. High income taxpayers are doing rather well with the new rules. My original thought was the biggest benefits would go to those well up the tax bracket ladder.

That has been the case, but significant tax reductions are being felt by those down to $100,000 of income and even lower!

My reading of the tax bill led me to believe lower income taxpayers wouldn’t benefit much. Eliminating personal exemptions while increasing the standard deduction was mostly a wash on the surface as the amounts generally offset.

The child tax credit enhancements are helping families with children. In the end, families in the upper middle class are doing well based on estimates.




Unexpected Results

The reason for this post is the unexpected results. Common knowledge on how the tax changes will affect taxpayers has been written about ad nauseam. There are plenty of surprises I do want to share.

As the first tax returns came in it started to look like the majority of clients would see nickels and dimes to their tax savings or additional tax next year. These early clients also tend to have very simple returns with lower income (at least for my client list).

My team and I review the expected changes with every client. We quickly discovered the tax savings frequently crawled lower down the income ladder. I personally find this a pleasant surprise. If a tax cut is going to work you need to give the break to those who will spend it. People like me only add it to the investment heap without helping the nation’s economy much.

Eliminating personal exemptions and replacing it with a higher standard deduction didn’t hurt as much as feared, especially if children are involved. Households without children are seeing minor changes unless their income is higher where they benefit from the lower tax brackets and longer time spent in lower brackets.

Retired clients were expected to see modest adjustments. However, because many retired persons can control their income stream somewhat due to timing of withdrawals from retirement accounts, they can react to the changes and plan for an overall lower tax liability.

The most unexpected result was the percentage of clients who will see a tax reduction. My client base is not a typical cross-section of the country. Low income taxpayers generally seek a different type of tax professional.

Of those facing a higher tax liability the numbers can be large. Most tax increases are nominal, but a few are significant. The worst part is I can’t tell you what to look out for. It always involves something unusual that affects the return negatively. All I can do is encourage a consultation with a tax professional after tax season. My guess is most taxpayers will find more value in a consulting session than they have for many years.

Two expected changes that turned unexpected are having a serious effect. Miscellaneous deductions on Schedule A, subject to 2% no longer apply in 2018 and after. These deductions had no affect for most taxpayers since the deductions in this category had to exceed 2% of adjusted gross income before it counted.

As a good accountant I studiously entered the information from clients even if I knew it wouldn’t count so they could see I didn’t miss it.

The things in the “subject to 2%” area of Schedule A include tax preparation fees, safe deposit box, union dues and specialty work clothes (uniform, safety glasses, steel tipped boots, et cetera). Most of these items are small enough not to change the amount itemized.

Certain education expenses fall into this category, too, along with certain legal fees from protecting or increasing taxable income.

But the biggest losers involve unreimbursed employee business expenses. Sales people top the list. I also have a rock band where equipment and travel not reimbursed by the band are no longer deductible.

Miles add up fast for traveling sales people. When I say traveling it usually involves local clients. Distant travel is more likely to be reimbursed by an employer.

There are a few planning tips. First, it’s best if the employer reimburses expenses. They’re not reported by the taxpayer receiving the reimbursement and deductible by the employer.

For the rock band and a few other clients I might recommend changing from an S corporation to a partnership. Before making this change it is vital to have your tax situation reviewed by a competent tax professional.

The reason for my recommendation to change to a partnership is that unreimbursed partnership expenses are fully deductible on page two of Schedule E and listed as UPE. The downside is the possibility of higher self-employment taxes.

The final Schedule A issue relates to the limitation on the so-called SALT (state and local taxes) deduction. In 2018 and after the SALT deductions are limited to $10,000. Most people assumed this only affected high income taxpayers from high tax states. Think again.

I have several clients from low tax states facing the cap. One Texas client saw a reduced estimated deduction because real estate and sales taxes pushed him above $10,000. And Texas doesn’t have an income tax!




Cautions

The more returns my office prepares the more I’m convinced clients will need to sit with me this summer and plan. You, kind readers, need to do the same.

I’m setting some appointments already. Due to the demands tax professionals will face this summer I recommend setting an appointment early. My office will accept consulting sessions from the beginning of May until the end of December. (The two weeks after the due date are for “me” time.)

One more thing before you prepare for the weekend.

There is a lot of confusion about the ACA (Obamacare) penalty for not having health insurance. The penalty applies for the current 2017 tax return being filed AND the 2018 return. The healthcare coverage penalty disappears in 2019!

My advice is plan. Of all years, this will be the one that gives you more bang for the buck than you’ve enjoyed for a long time.

Now go and have some fun. See y’all tomorrow for Stalking the Accountant.