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.
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.
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”.
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.
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.
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.
It happens more often than you think. The IRS issues erroneous refunds all the time and you suffer the consequences if you handle the issue incorrectly. Missing refunds and reduced refunds are even more common. There is a procedure to handle each situation. Following procedure will avoid penalties due to an IRS error.
We Start with a Missing or Reduced Refund
A surprise refund in the middle of summer from the IRS quickly raises suspicions “this might not be a good thing”. However, refunds for less than anticipated are more common. Missing refunds top the list.
Before you panic, refunds have a general time table. If your refund is AWOL you might need to practice patience first. If it’s been less than three weeks since you e-filed (six week for paper filed returns) you need to wait a bit longer. Calling the IRS will waste a good portion of your day only to hear the friendly IRS employee say you need to wait at least 21 days before they can do anything.
If the allotted time has elapsed you can check on your refund status online. (You can actually check your refund status few hours after e-filed and it should show up as received.) You will need your Social Security Number, filing status and exact amount of your expected refund. Sometimes the IRS tells you to wait a bit more as they continue processing your tax return. This happens a lot with returns containing credits, especially the Earned Income Credit.
If a problem exists with your return the IRS should let you know. If the IRS says your return has been processed and refund issued you will be given a chance to file a dispute in the IRS’ refund status page.
Amended tax returns use a different search tool on the IRS site. Amended returns are always paper filed for individuals and take around four month to process and a refund issued.
If your refund is less than requested on your filed return you should start with the refund status link above. The IRS should tell you why your refund was reduced.
If your refund is lost or you disagree with the offset portion of your refund you have several choices to resolve the problem. Only contact the IRS if the refund offset was for federal taxes. Other offsets issues should be directed to the agency that received the offset funds. Common refund offsets include: child support arrears, delinquent state taxes and unemployment compensation debt. If you really owe the money you’re probably not getting all the refund you expected.
Surprise IRS refunds are more common than you think. Non-clients stop in the office (or call) several times per year asking what they should do about a refund they didn’t expect. There are set procedures when this happens. If you don’t follow IRS protocol on an erroneous refund you could be on the hook for interest charges and even penalties. If the amount not yours is large enough it could become a criminal issue! And it was the IRS’ fault!
Usually refunds are not larger than expected. If you receive more refund than expected, review your return and the refund status link above for an explanation. Usually you are owed the larger refund. Verify before cashing the check.
When the IRS changes a refund an explanation is mailed to the address of record. A phone number is provided to dispute or verify the change.
The complete surprise refund from the IRS is rare, but happens often enough for a small office like mine to help worried taxpayers unsure what to do with their newfound largess.
IRS procedures cover erroneous refund checks before and after they are cashed and direct deposits.
If the refund check hasn’t been cashed, VOID the endorsement area on the back of the check. Return the Treasury check to the IRS office where the check came from within 21 days. This is found at the bottom of the check and before the words TAX REFUND. I have included addresses at the end of this post. Do NOT attach, staple, bend or tape the check in any way! Include a note stating “Return of erroneous refund check because (and give a brief explanation of the reason for returning the refund check).”
If you got excited and cashed the check, submit a personal check or money order within 21 days to the appropriate IRS office listed below. Since the check is cashed you may not recall which office the check came from. In that case you need to call the IRS at 800-829-1040 for individuals and 800-829-4933 for businesses. Let the operator know you need information to repay a cashed erroneous refund check. Yes, you will be on hold a while so it’s best not to cash a refund check unless you are really owed the money.
Also, write on the check or money order: Payment of Erroneous Refund, the tax period for which the refund was issued, and your taxpayer identification number (social security number, employer identification number, or individual taxpayer identification number). Include a brief explanation why you’re returning the refund. If you cash an erroneous refund check expect to pay interest to the IRS.
Direct deposits of erroneous refunds are problematic. You may not be aware of the erroneous refund until you get your monthly statement from the bank or check your account. Once again, interest probably will accrue for an erroneously direct deposited refund. If the money is promptly returned the IRS may waive the interest due to their error. If you wait more than 21 days the IRS generally assesses interest and expects you to pay.
Contact your bank and have them reverse the erroneous refund immediately. Call the IRS at 800-829-1040 for individuals or 800-829-4933 for businesses to explain why the direct deposit is being returned.
Deeper Refund Issues
Sometimes you end up scratching your head over a refund issue or did all the right things and the IRS persists in penalizing you for their mistake. In these instances it’s time to call out the Taxpayer Advocate.
The Taxpayer Advocate (TAS) works inside the IRS on your behalf. The guys at the 800 numbers are nice enough, but lack the experience, tax knowledge or authority to fix most serious problems. The Taxpayer Advocate office is staffed by knowledgeable tax people able to work directly with the IRS agent handling your file. TAS answers the phone faster and gets the job done sooner. They even call you back with progress reports! The most seasoned staff is reserved for tax professionals.
My office has used the TAS many times with great results. Use the link above and click the Contact Us button to find the closest TAS office to you.
IRS Addresses to Return Erroneous Refunds
ANDOVER – Internal Revenue Service, 310 Lowell Street, Andover MA 01810
ATLANTA – Internal Revenue Service, 4800 Buford Highway, Chamblee GA 30341
AUSTIN – Internal Revenue Service, 3651 South Interregional Highway 35, Austin TX 78741
BRKHAVN – Internal Revenue Service, 5000 Corporate Ct., Holtsville NY 11742
CNCNATI – Internal Revenue Service, 201 West Rivercenter Blvd., Covington KY 41011
FRESNO – Internal Revenue Service, 5045 East Butler Avenue, Fresno CA 93727
KANS CY – Internal Revenue Service, 333 W. Pershing Road, Kansas City MO 64108-4302
MEMPHIS – Internal Revenue Service, 5333 Getwell Road, Memphis TN 38118
OGDEN – Internal Revenue Service, 1973 Rulon White Blvd., Ogden UT 84201
PHILA – Internal Revenue Service, 2970 Market St., Philadelphia PA 19104
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.)
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.
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.
The latest tax cuts have sent the eight year old stock market rally on a steeper trajectory after 300% gains to date. Tax cuts and interest rate reductions have a habit of sparking market rallies, but only one has anything to do with value.
To understand why the market is rallying so hard you have to understand what people expect the corporate tax cuts to do. You also need to understand if these gains are based on real increases in value or only a mirage.
The corporate tax rate for regular corporations dropped from a top rate of 35% to a flat rate of 21%. For most corporations this means a 40% reduction in federal income taxes.
With all this extra money sticking around the corporate coffers there is ample reason to think this is really something to behold. The extra money can be used to retire debt, buy back stock, pay out dividends or invest for future growth.
But are these companies really worth more? Is there more value just because one expense will decrease for one year?
If a company is earning :
- $10.00 per share
before the tax reduction and if everything remains exactly the same will see a:
- $2.00 per share
increase in profits due to lower taxes, what value has been created?*
The company has $2 more per share in cash lying around and that does have value in a manner of speaking, but it’s not repeatable.
The corporation earns $10 per share in year one, $12 per share in year two and again $12 in year three even if the company is bloated and slow. Worse, incompetent management could spend the money on stupid stuff!
Our corporate illustration shows a company with 20% growth over a three year period, but only treaded water in reality. The tax cut makes it easier to hide problems for longer before it becomes apparent to shareholders they are getting screwed.
The Value of a Dollar
Shareholders might not care one iota as long as the money keeps rolling their way. The extra money the corporation enjoys from the tax cut can prop up the stock price if they buy back shares. Additional dividends also put a mischievous grin on the faces of shareholders.
Now think about this for a moment. How much is that $2 per share extra from tax savings worth?
The value of the cash is $2. Period. How much will you pay for the $2 of cash? No more than $2, I hope.
By looking at the stock market it appears as if investors are paying more than $2 for the $2 per share tax benefit!
The tax cut isn’t repeatable either! People wrongly think the tax cuts help the next year. It doesn’t! Earnings are now stuck at $12 per share instead of $10 unless there is real growth. There is no growth in our example. How much would you pay for $12 per share if there is no growth with the risk management screws it up and ruins a bad game to start with?
The value of those earnings is based on interest rates. If the risk-free interest rate (U.S. Treasuries) is 3%, then the value of the $12 of stagnant earnings is no more than $396 per share ($396 x 3% = ~$12). If the risk-free rate rises then the value of the future earnings declines.
So why is the market rallying so hard? Because the extra $2 times the risk-free rate translates into $60 or so!
The Bad News
Unfortunately interest rates are not static. They are currently rising at a slow rate. It can only be guessed what inflation (the ultimate factor driving interest rates) and interest rates will do in the foreseeable future.
With an economy near full employment and stimulated with massive tax cuts, my guess is rates will go higher. This means those earning are worth less. And that assumes the extra $2 goes to the owners (investors)!
In the early 1980s the top brass in corporate America earned about 30 times the wage of an average worker. That number now stands well into the 200s. With more cash than ever, corporate America might be seduced into skimming a bit for themselves. I’m not suggesting anything, only making an observation.
Dividends are real cash you can count in your paw. Stock buy-backs are a bit more elusive. Stock buy-backs can mask stock grants and options to insiders.
It is safe to say only a portion of the extra $2 per share in profits due to the tax cuts will actually find its way into shareholders’ pockets. Depending on how you look at it, that could be a blessing.
Creating Real Value
If tax cuts don’t create real value, what does?
As stated before, the quality of future earnings is based on the risk-free interest rate. If you can’t earn more than that, why bother. Just drop your money into the risk-free asset and enjoy a few Mai Ties on the beach.
We discussed in April 2016 how companies create true value. Now is a good time to revisit the issue before your money gets a value lesson of its own.
Tax cuts provide the opportunity to create value; they don’t in and of themselves create anything! If tax cuts are not fully spent and the government lowers spending to offset the lost revenue, the economy will actually decline. If the government keeps spending while reducing taxes they do so with borrowed money. Knowing this, tax cuts have the same stimulus as the government just spending extra money themselves.
And tax cuts have historically not been 100% spent by those receiving the cut. Some people reduce debt or invest some of the newfound wealth. And since tax cuts are only good for one cycle their benefits are fleeting unless you keep cutting taxes every year.
This doesn’t mean we shouldn’t have tax cuts. Heck, no! I love keeping more of my money!
What I’m getting at is this: your income hasn’t increased solely because your tax bracket declined! And once you digest the reduced taxes into your budget you’re going to look for a pay increase to keep feeling warm and fuzzy inside.
So how do you get a raise? Well, inflation can mask any “real” wage increase if it doesn’t exceed the inflation rate. Or, you can increase your productivity so the company has more profits for your labor from which to pay you. (Now you need the corporation to part with a percentage of those additional gains you generated. That hasn’t happened much over the last 30 years.)
If tax cuts don’t create real value, what does?
If the stock market rally is going to have real legs corporations will need to invest the tax savings in a productive way!
Corporate America has experienced record levels of profitability for some time now so the question begs to be asked: If they didn’t invest the extraordinary profits before, why will they be encouraged to do so now?
Good question. Wish I had an answer.
Personally, I don’t think corporations will increase investing anywhere near the levels of the tax break. We see headlines listing a token few major corporations granting a small 2% or so bonus to the rank and file for one year while announcing layoffs a few days later. (Kimberly-Clark announced 5,000 layoffs in their diaper division as I write. Tax cuts will not increase demand for things people don’t want. But automation, which the new tax bill encourages, will make human capital less necessary.)
Only businesses that invest the tax savings wisely will create real lasting value. By investing in increased production which yields more than the cost of capital, value is only realized.
The ROIC must exceed the COC or value is destroyed. Automation and technology make it easier than ever to do more with fewer people. This increases quality of life. But if the process is too quick it becomes a painful transition.
Now that most assets can be deducted currently versus being depreciating over a number of years or the life of the asset, businesses are incentivized more than ever to increase their use of technology and automation.
If these investments return more than the cost of capital, even capital derived from tax savings, real and lasting value is created.
And that will keep the stock market riding high, providing us with the warm and fuzzy feeling inside.
* I took liberty with the math for easier reading. A company at the top tax bracket of 35% under the old tax law would pay about $3.50 per share on $10 of profits before tax. Cutting their tax by 40% would not be $2 per share. (40% of $3.50 is $1.40.) In reality it would take ~ $16.67 of profits to pay ~ $6.67 in tax to arrive at $10 of reportable gains to shareholders. Rather than get bogged down in the math I kept it clean, as a family-oriented blog should be.
The age-old question has flooded my in-box: Should I do my own taxes?
I try to give a short encouraging reply, but it always feels contrived. Normally I write: If you are comfortable preparing your own taxes you should at least see how the process works by trying. If you run into an issue or don’t know the tax law on a certain area of your return you can always call in a professional.
You may have already received a similar email from me if you asked the question. In the name of efficiency I should keep my reply in a file for a faster copy and paste. But I don’t. I write the thing out every time and it’s starting to sound like a broken record.
The short answer salves my conscious by answering a call from the dark. There real answer, however, is a bit more involved.
If I do this right you should be in a better position to determine if you should be doing your own tax return so pay close attention. I’m only going to say this once.
Either Way I Win
The reason so many people email me with “the” question is because they see I offer a DIY tax program on this blog. The banners and links are an affiliate program. I also get paid when I prepare a tax return. I win either way.
Don’t take this as an arrogant slight. My intention is to disclose my relationship to whatever decision you make. Someone in my profession is getting paid regardless.
My biggest concern when people prepare their own return is they think they know what they’re doing when they really don’t. I see self-prepared returns often enough to see some really ugly problems the IRS will take a serious interest in.
That doesn’t mean you should hire a pro. Many errors I see on self-prepared returns have nothing to do with tax law! Unreported income and missed deductions are the two biggest issues I see. This isn’t a tax law issue; it’s a sloppiness issue.
A recent return my office amended, the client reported all the rental deductions (except depreciation) but missed adding any rental income. It was a serious matter!
My first recommendation for you when considering preparing your own taxes involves organization. If your tax records are stuffed in a paper bag or scattered everywhere you probably need a tax pro to crack the whip. Guys like me are in a better position to make a judgment call on missing information. There are disclosures a tax professional can attach to a tax return telling the IRS how the situation was handled. If the tax pro uses a reasonable method it virtually avoids an audit on an issue with no clear answer. Remember, the last thing you want is to be in an audit going, “Ahhhhhhh . . . .”
Call in the Troops
There is nothing wrong with doing your own return to the best of your ability and then hiring a tax pro for the return you will file. (Read the last sentence again and again until it sinks in.) Yes, you might have two prep fees for the year: one for the DIY program (required when you print) and the accountant. But you will also see where you missed things.
An alternative is to hire a tax pro when you have a unique issue and then go back to preparing your return for a couple years. Some accountants hate this. I don’t. What you consider hard I consider a normal day at the office. My computer updates your personal information annually so when you come back is six years I just pick up where I left off. I probably have data you already forgot about allowing me to bring you back up to speed.
Finally, there is no harm in having a tax pro review your return prior to filing. Yes, you will be charged. You want to be billed for the review! A knowledgeable tax pro will demand payment for her time. Payment also increases the chances the tax pro will give your return the review it deserves.
Preparing your own tax return is scary for some people. It shouldn’t be. Most software, including the program on this blog, has plenty of help features. If you plan on preparing your own return I hope you consider the 1040 program links and banners here. (Man has to eat.) If not, no worries. (Zig Ziglar always said you must ask for the sale. I never argue with Zig.)
Even if you hire your tax work done, consider opening a file at 1040 (the DIY software here) and seeing how well you do compared to the pro. There is no cost until you print and/or e-file. You might be better at it than you think.
Regardless, you can always call in the troops if you find yourself in too deep. Hiring a pro if you are concerned about anything on your work is not a sign of weakness! At the very minimum you have a better understanding of what the accountant is doing on the other side of the desk.
Tax pros get it wrong, too! Much of what we get wrong is the result of a misunderstanding or outright lack of knowledge of your personal situation. You know you better than I ever can. If I don’t find the right questions to get the answers needed for an accurate return I’m going to get it wrong. Even practicing DIY preparation can open your eyes to additional tax liability reductions. No tax pro would ever be offended by that!
The Boss is Back
After several years of adjustment to a national footprint my firm is finally gaining traction. I’ve trained new staff, added new technology (something old guys set in their ways resist) and focusing on our niche, we are ready to accept a few additional clients this year.
I’m opening the gate (LOOK OUT TEAM!!! THE HERD IS LOOSE!) a smidge. Technology will free serious amounts of my time to work with more clients directly. Scanning technology enters virtually the entire return so my task is to review and organize the return for maximize efficiency and audit proofing.
Now that the computers will enter most data I stand a lower risk of a carpel tunnel relapse. (I never had carpel tunnel issues and hope to keep it that way.)
You don’t want to pay me for data entry services; you want me for my experience and tax knowledge. By unleashing the IT guys we can do more, better than before.
If you need an accountant, contact me. We aren’t the cheapest (just so you know up front), but I dig deeper than most accountants you’ve met. I don’t stop at a merely accurate return. I’m always looking for items missed. In short, I give every return moving through my office a proctology exam. Don’t worry. I have plenty of latex gloves.
Be prepared for a summer consulting session considering the new tax laws if my office handles your tax return.
I strongly encourage you to try your hand at preparing your own return. If you have a business or rental properties you might want to forgo the DIY option. A good tax pro will know many ways to cut your taxes the DIY programs can’t possibly ask in these situations. It is still a valuable exercise to walk through the process yourself, however, to see if there are things even the accountant didn’t ask.
If you start to feel uncomfortable you can always call in the troops.
An Even Better Game Plan
2017 tax year will look and feel like previous years. You can continue preparing your own return without much issue. The few changes from the TAX CUT AND JOBS ACT that do affect 2017 should be handled automatically by the DIY software (all of them, not just mine) as long as you enter the data correctly.
2018 is another animal. You might want to plan ahead. Secure an accountant for the 2018 tax return or at least have a consultation on issues pertinent to you.
Finding a qualified tax pro is hard to impossible. I feel your pain. I need to hire tax pros to do the work and face the same issues. But it’s not impossible.
Accountants will be under a lot of pressure over the next year as small business owners plan for the tax law changes affecting them. Time will be at a premium.
A summer consultation is probably a good idea. Be sure to provide the tax pro a copy of your filed 2017 return. Nobody has been shot amending a return to correct missed or incorrectly handled data except for three guys in Ohio, but they had it coming. (Sorry for picking on Ohio. I still love you guys. (Maybe I should have said Delaware.))
If you find yourself in too deep preparing your own return, call a tax pro! Yes, we are all busy during tax season. But nobody has ever been shot for filing an extension except for those three guys again from Ohio.
Oh, who am I kidding? Use good judgment preparing your own return or call me (or another tax pro). It’s your only hope, especially if you’re from Ohio.
Plenty has been written about the recent tax bill. Most news reports repeat the same information. I want to expand on what is widely known to include some lesser opportunities to reduce taxes and pitfalls most people (and many tax professionals) are unaware of.
On January 12th I’m attending an update course on the tax bill. If I learn something new worth publishing I’ll write one more broad post on the tax bill.
Regardless, once these preliminary posts are out I will start working on more targeted tax topics the tax bill opened. A post I’m eager to write involves the issues surrounding the new business income deduction. The IRS will have to create a worksheet to cover all the issues in the tax bill designed to prevent people from gaming the system. I’ll attempt to create the worksheet before the IRS does and provide options FOR gaming the new tax laws. There will be plenty of opportunities for those who plan and plenty of risks for those who don’t dig deep enough into the Code to organize their tax matters optimally.
Finally, before we start, I’m leaning heavily on The Kiplinger Tax Letter (not an affiliate link) for this post. The words are mine, but Kiplinger is providing the mental tickler helping me decide what to include here and the order. The words are all mine with exception of what is lifted from the tax bill. Some things are hard to say in a new and unique way so I’ll parrot what you’ve read multiple times on other news outlets. I promise to add some of my patented secret sauce to keep it as fun as new tax law discussions can be.
Remember the tax rules for 2017. If a future Congress doesn’t address the temporary nature of the individual changes we go back to 2017 rules after 2025.
Standard deduction: For 2018: $24,000 joint returns; $18,000 for head of household; $12,000 for singles. Taxpayers age 65 and over and/or blind get $1,250 extra per person on a joint return; $1,550 for others. (Yes, married people get less than singles when they reach 65 or are blind.)
Personal exemptions: Gone. As if you haven’t heard that often enough.
Mortgage interest: Pay special attention here. There are several issues to consider.
In the past you could deduct interest on up to $1 million of new acquisition debt on your primary residence or second home. This has been reduced to $750,000.
However! the new rule usually applies to NEW mortgage debt entered into AFTER December 14, 2017.
Old loans use the old rules!!!
ALL home equity loan interest is NOT deductible after 2017. HELOCs have no tax advantages this year.
Pass the SALT: State and local tax deductions are capped at $10,000 annually for 2018 and after. You can use the full $10,000 limit on any combination of residential property taxes, income taxes or sales taxes.
Property taxes ARE FULLY deductible for income property reported on Schedule E. The same applies for mortgage interest, subject to the passive activity rules and at-risk limitations.
Moving expenses: Gone, except for military.
Unreimbursed employee business expenses, IRA fees, brokerage fees, tax prep fees, safe deposit box fees: Gone!
Theft losses: Generally, gone.
Casualty losses: Personal losses are gone unless in a presidentially declared disaster area.
Alimony: Pay special attention to the dates here. POST-2018 divorce decrees with alimony are NOT deductible to the payer and NOT included in income for the recipient. The old rules still apply for prior divorces and those finalized in 2018 or earlier.
The good news isn’t all good for the recipient. Alimony isn’t taxable for post-2018 divorces, but alimony was considered earned income in certain instances prior. An alimony recipient can’t fund an IRA with post-2018 divorce alimony payments unless she has other earned income. This may sound mute, but consider the planning strategy of regular Roth IRA contributions with the intent of passing the account to beneficiaries after death. It’s an uncommon issue that still needs airing.
Charitable deductions: Itemizing has been pared back significantly due to the higher standard deduction. While many people will have fewer tax advantages contributing to a non-profit in the future, those who donate a large percentage of their income have an added tax break.
The old rule allowed a deduction for up to 50% of AGI for cash donations in any one year. That limit is now increased to 60%. Most people will not have an issue with this, but taxpayers funding a donor advised fund, NIMCRUT or similar philanthropic vehicle will potentially benefit. Unused charitable deductions are carried forward for up to five years.
Hobby expenses: Gone! This is huge for anyone with an income producing hobby. It may hasten your decision to conduct your affairs as a business.
Medical deductions: The old rule is back. Medical expenses are deductible once you surpass the 7.5% AGI threshold if you itemize. Unfortunately, the break only lasts for 2017 and 2018. Then it’s back to the 10% of AGI threshold.
Tax brackets: We keep seven brackets, but with lower rates. It also takes longer to get to the higher brackets. Those on the edge of creeping into a higher bracket benefit the most from the higher income required to trip into the higher bracket.
Inflation indexing: We’ve talked about this before. The chained-CPI will be used for taxes which reports lower inflation. Over time this will bite every taxpayer hard.
LTCG: Long-term capital gains are the same as before with a notable exception. The break point where a higher LTCG rate applies is different from the actual tax brackets. You can thank the tax profession lobby for this added bit of complication. Actually, my peers had nothing to do with it, but it stands a good chance of lining our pockets nicely over the next years.
The net investment income tax of 3.8% survives. Lucky us. (Once again, always nice to see extra complexity as a form of job security for the guys with pocket protectors.)
AMT: The alternative minimum tax lives, albeit with a reduced influence. The AMT exemptions are higher: $109,400 for joint filers and $70,300 for the rest of the crowd.
The exemption phaseout begins at $1 million for joint filers and $500,000 for others now.
Health insurance mandate: Stop the high-fives! The mandate still applies to 2018! The mandate is gone afterwards.
Child tax credit: People are only hearing part of this story, too. The child tax credit is increased to $2,000, but ONLY $1,400 is refundable. It will make a difference for some low income filers.
A new non-refundable $500 credit now exists for 2018 and after for a non-qualifying child: elderly parent and disabled child are two examples.
Estate tax: The annual gift tax exclusion is $15,000 per donor to each donee in 2018. (A married couple can give $30,000 to each of their children if structured properly.) The lifetime estate and gift tax exclusion was raised to $11.2 million for 2018.
Step-up in basis for heirs is unchanged.
Note on trust or estate tax brackets: Trusts and estates hit the top tax bracket (37%) at $12,500. This is important for more than just trusts and estates now as you’ll see in a moment.
Kiddie tax: In the past the kiddie tax was based on the parents’ marginal tax rate. This caused plenty of problems over the years for a variety of reasons we’ll avoid discussing today. Starting in 2018 the kiddie tax for unearned income and capital gains is calculated using the estate and trust rates for children under 18. There were a lot of old rules which changed several times over the years. The kiddie tax should be easier to figure because it’s calculated without regard to the parents’ tax information.
Retirement accounts: There was a lot of angst as Congress debated significant changes to retirement plan funding. The angst was for naught. The only notable change is the loss of the ability to undo a traditional IRA to Roth conversion.
ABLE savings accounts: In certain circumstances you can rollover from a 529 plan into an ABLE account tax-free. Payins are also eligible for the saver’s credit if made by the beneficiary over the $15,000 annual limit.
529 plans: Starting in 2018 you can now take up to $10,000 in annual distributions from a 529 plan for elementary and secondary education. This includes religious schools.
Corporate tax rates: Dropped from a top rate of 35% to a flat 21%. As one reader commented recently, this could be a tax increase from very small regular corporations. Business owners need to consult with their tax professional.
Regular corporation AMT: The alternative minimum tax for regular corporations is gone.
Business income deduction: I will be writing extensively on this topic in the near future. There are many issues to consider I want to fully flesh out.
Note: investors in REITs and partners in publically traded partnerships qualify for the deduction. Therefore, not only do business owners need to consider the new deduction, some investors do, too.
Business losses: People are not paying attention to the cap now on business losses! Joint returns are allowed up to $500,000 in business losses; all others $250,000. Any remaining loss is non-deductible in the current year and is carried to the next.
Bonus depreciation: 100% bonus depreciation is available for many assets placed in service after September 27, 2017 and until the end of 2022. Bonus depreciation phases out over fives after 2022. Passenger autos also get higher limits.
Business interest: The business debt interest deduction is capped at 30% of adjusted taxable income. The new rule only applies to businesses with over $25 million in gross receipts. Some companies are exempt.
I bring this up because I want to see how well this works as interest rates climb. It might play into investment decisions down the road. Also, higher interest rates could affect certain firms more than others due to their debt load. Thinks Tesla and similarly leveraged companies.
Other business deductions:
Business entertainment: Gone!
Country club dues: Gone!
The 9% domestic production deduction: Gone! Not that I’ll miss it. I always felt it was a pain in the tail feathers to deal with.
NOLs: Net operating losses can only offset 80% of taxable income now and usually must be carried forward only. (Many states didn’t have NOL carryback rules anyway; it was carryforward only.)
Like-Kind exchanges: Are for real property only now as long as it isn’t held primarily for sale.
Transportation deductions: Most employer provided transportation benefits are no longer deductible by the employer. Biking is specifically excluded!
Paid family leave: I’m not hearing much about this new credit and I think it’s because it only applies to the 2018 and 2019 tax years. The credit is 12.5% of paid medical or family leave wages; more if the paid leave is greater than 50% of regular wage. Consult your tax professional if planning to use this credit. The rules are extensive.
Tax on College! Private colleges with over 500 students and over $500,000 per student in “non-education-related assets” are assessed a 1.4% excise tax per year!
In the United States we spend more on prisons than education, and if you haven’t noticed, we are getting exactly what we’re paying for. I suggest we add a new tax on prisons and jails and watch how fast the crime rate drops in these parts.
It’s all, about the incentives, dear readers; all about the incentives.