Category Archives: Tax Tips

Consolidated Appropriations Act of 2020 contains numerous tax law changes

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President Trump on December 20, 2019, signed into law H.R. 1865 (“The Further Consolidated Appropriations Act, 2020”), a government funding bill that includes significant tax provisions addressing the extension of over 30 expiring tax provisions, retirement plan provisions and disaster relief provisions. The new law includes some substantive changes to TCJA provisions. However, it does not address errors made in drafting the TCJA (i.e., TJCA technical corrections). Thus, for example, it does not correct errors made in drafting provisions relating to the depreciation of qualified improvement property, the effective date of net operating loss deduction changes, or the deduction of legal fees in connection with sexual misconduct.

The following list is a summary of the more significant retirement plan changes:

• The starting date for making required minimum distributions from an IRA is the year the owner turns age 72.
• The age 70½ limit for making IRA contributions no longer applies.
• Under prior law, funds contained in IRAs (and qualified plans) that a non-spouse inherited IRA could be withdrawn over the beneficiary’s life expectancy. Now, so-called “stretch” IRAs are eliminated by virtue of requiring non-spouse IRA beneficiaries (except for a minor child of the IRA owner, chronically ill individual, or anyone who is not more than 10 years younger than the IRA owner) to withdraw funds from inherited accounts within 10 years.
• Long-term part-time employees qualify to participate in a 401(k).
• 401(k) plans are permitted to adopt qualified birth or adoption distributions.
• A new tax credit is allowed for small employers using auto enrollment into their 401(k) plans.
• The legislation adds a new exemption from the 10 percent penalty of I.R.C. §72(t) for early withdrawals from a retirement account. Under the provision, a parent is allowed to withdraw up to $5,000 of funds penalty-free from a 401(k), IRA or other qualified retirement plan within a year of a child’s birth or the finalization of a child’s adoption.  The provision is applicable for distributions made after 2019. 
• Taxable non-tuition fellowships and stipends and nontaxable difficulty of care payments earned by home healthcare workers are treated as compensation for purposes of retirement plan contributions.
• Provisions that allow employers to encourage employees towards lifetime annuities.
• Plan administrative changes that provide additional flexibility for employees and reduce costs for employer sponsors.

The most significant tax provisions that had previously expired are now extended by the Act and listed below:

• Cancellation of qualified principal residence indebtedness exclusion from gross income has been extended through the end of 2020.
• Mortgage insurance premiums deduction has been extended through the end of 2020.
• Medical expense AGI limitation threshold reduced from 10% to 7.5% of AGI for all taxpayers for regular tax and for AMT purposes has been extended through the end of 2020.
• Tuition and fees deduction has been extended through the end of 2020.
• Indian employment credit is extended through the end of 2020.
• Race horse two years old or younger treated as 3-year property instead of 7-year property has been extended through the end of 2020.
• Empowerment zone tax incentives has been extended through the end of 2020. • Nonbusiness energy property credit has been extended through the end of 2020.
• Alternative motor vehicle credit for qualified fuel cell motor vehicles has been extended through the end of 2020.
• Alternative fuel vehicle refueling property credit has been extended through the end of 2020.

The new law also includes a number of miscellaneous provisions, including:

• The repeal of the excise taxes on high cost employer-sponsored health coverage (Cadillac plans) and medical devices that was first enacted under the Affordable Care Act (ACA).
• The repeal of the fee on health insurance providers that was first enacted under ACA.
• The application of the estate and trusts tax rate to unearned income of children (the kiddie tax) has been repealed and replaced with the use of the parents’ tax rate for tax years after 2019.
• The parking tax on certain employee fringe benefits has been repealed.

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IRS EXPANDS LIST OF QUALIFIED HEALTH CARE BENEFITS FOR HDHP

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The Internal Revenue Service has added care for a range of chronic conditions to the list of preventive care benefits that may be provided by a high deductible health plan (HDHP). Notice 2019-45 (PDF) lists the new types of medical care that may be treated as preventive care for this purpose.

Individuals covered by an HDHP generally may establish and deduct contributions to a Health Savings Account (HSA) as long as they have no disqualifying health coverage. To qualify as a high deductible health plan, an HDHP generally may not provide benefits for any year until the minimum deductible for that year is satisfied.  However, an HDHP is not required to have a deductible for preventive care (as defined for purposes of the HDHP/HSA rules).

The Treasury Department and the IRS, in consultation with the Department of Health and Human Services, have determined that certain medical care services received and items purchased, including prescription drugs, for certain chronic conditions should be classified as preventive care for someone with that chronic condition. The list of chronic conditions include diabetes, hypertension, congestive heart failure, asthma, osteoporosis, liver disease, heart disease and liver failure.

These medical services and items are limited to the specific medical care services or items listed for the associated chronic conditions specified in Notice 2019-45. Any medical care previously recognized as preventive care for these rules is still treated as preventive care.

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IRS Issues Guidance On What Business Meals Are Deductible

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I often receive questions regarding what is a deductible business entertainment expenses, particularly with regard to business meals.  The IRS has recently issued guidance on this issue in light of some of the changes brought about by the 2018 tax law changes.  I hope you will find these examples helpful.
EXAMPLE ONE
Aaron invites Brad, a business contact, to a baseball game. Aaron purchases tickets for himself and Brad to attend the game. While at the game, Aaron buys hot dogs and drinks for himself and Brad. The baseball game is entertainment. Thus, the cost of the game tickets is a nondeductible entertainment expense. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the IRC section 274(a)(1) disallowance rule. Therefore, Aaron may deduct 50% of the expenses associated with the hot dogs and drinks purchased at the game.
EXAMPLE TWO
Chris invites Dan, a business contact, to a basketball game. Chris purchases tickets for himself and Dan to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages. The basketball game is entertainment. Thus, the cost of the game tickets is a nondeductible entertainment expense. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to the IRC section 274(a)(1) disallowance rule. Therefore, Chris may not deduct any of the expenses associated with the basketball game.
EXAMPLE THREE
Assume the same facts as in Example #2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. As in Example #2, the basketball game is entertainment and, thus, the cost of the game tickets, other than the cost of the food and beverages, is a nondeductible entertainment expense. However, the cost of the food and
beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the IRC section 274(a)(1) disallowance rule. Therefore, Chris may deduct 50% of the expenses associated with the food and beverages provided at the game.
If you have any questions, please contact Steve Siesser at ssiesser@verizon.net
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2018 Tax Law Changes

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With the sweeping tax package bill about to become law, taxpayers are scrambling to find out how it might impact them and what steps, if any, they should be taking before the end of 2017 to maximize tax savings opportunities this year and for next year.  The situation is further complicated by all the mis-information be disseminated by the media and so-called tax experts.

For example, one concern I’ve been hearing from entrepreneurs and self-employed people is that they would no longer be able to deduct ordinary business expenses like a home office or staples, for that matter.   The confusion comes from the fact that there are two ways in which taxpayers can claim the home office deduction and other business expenses.  The first is in connection with a legitimate business by a taxpayer who operates as is a sole-proprietor (or LLC) and files Schedule C with their 1040.

There are no changes to this rule for self-employed taxpayers.

The other method for deducting business expenses is if the taxpayer is an employee and incurs out-of-pocket, unreimbursed expenses on behalf of your employer.  In that case, you’ve been able to deduct such expenses on Schedule A, provided, 1) you are able to itemize your deductions and 2) only to the extent that your claimed business expenses exceed 2% of your adjusted gross income.

Thus, if the increased standard deduction takes away your ability to itemize deductions, then you, as employee with unreimbursed business expenses, would lose the potential ability to take a deduction.

If you have been following me on Twitter (@StevenSiesser), you already know:

  • The final version of the tax legislation includes a provision that would disallow a deduction in 2017 for any prepayment of 2018 property taxes or 2018 state and local income taxes (otherwise known as SALT)
  • The final bill leaves many education tax breaks untouched – the deduction for student loan interest, the Lifetime Learning Tax Credit and the American Opportunity Credit. The final bill does not touch a $250 tax break for teachers who buy their own school supplies.
  • If you’re subject to the alternative minimum tax or close to it, you probably won’t get a tax benefit for pre-paying your 2017 real estate tax bill or pre-paying your 4th quarter state income tax estimated voucher in December.
  • Interest on home equity loans will no longer be deductible beginning in 2018 under the tax bill so it may be beneficial to pay your January 2018 home equity loan payment and regular mortgage payment in December 2017 to get an increased interest deduction.

There are so many moving parts to this tax legislation that the only answer I can give clients is, “It depends on your specific situation.”

However, there are some general tips I can share with you:

  • The floor for deducting medical expenses on Schedule A will decrease from 10% in 2017 to the “old” 7.5% floor, but only for 2018 and 2019, returning to 10% in 2020. Therefore, if you’re expecting significant medical expenses in 2018, consider delaying incurring or paying any more medical expenses in 2017.
  • If you’re self-employed, hold off on invoicing or taking payments until 2018, when your tax bracket could be lower.
  • Consider giving more to charity in 2017 because there’s less tax benefit in 2018 if you’re in a lower bracket or you don’t qualify for itemizing your deductions. The best charitable gift is appreciated publicly traded stock since you would also avoid paying capital gains taxes.
  • Consider rolling any home equity loan into a refinancing of your current first mortgage.

One more important change:  Starting in 2019, alimony would no longer be deductible by the payor for new decrees and payments would be excluded from the recipient’s income.

Most importantly, be aware of the Alternative Minimum Tax.  The only change to AMT was to slightly increase the exemption for next year, meaning only that there is a slightly higher entry point to being subjected to it.  If you’re not sure whether you have been paying the AMT, simply look at your most recent Form 1040, Page Two, line 45 and/or Form 6251.

If you are subject to AMT in 2017, you have limited options for minimizing your taxes under the new tax package.

Bottom line:  Time is running short.  Please contact me if you wish to retain me to perform a detailed analysis of your specific situation.

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ALERT: New Phishing Scam

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The Internal Revenue Service is alerting  the public to a fake insurance tax form scam that is being used to access annuity and life insurance accounts.  Cybercriminals currently are combining several tactics to create a complex scheme through which both tax professionals and taxpayers have been victimized.
There may be variations but here’s how one scam works: The cybercriminal, impersonating a legitimate cloud-based storage provider, entices a tax professional with a phishing email. The tax professional, thinking they are interacting with the legitimate cloud-based storage provider, provides their email credentials including username and password.  With access to the tax professional’s account, the cybercriminal steals client email addresses. The cybercriminal then impersonates the tax professional and sends emails to their clients, attaching a fake IRS insurance form and requesting that the form be completed and returned. The cybercriminal receives replies by fax and/or by an email very
similar to the tax professional’s email, using a different email service provider or a slight variation to the tax pro’s address.
The subject line varies but may be “urgent information” or a similar request. The awkwardly worded text of the email states:
Dear Life Insurance Policy Owner,
Kindly fill the form attached for your Life insurance or  Annuity  contract details and fax back to us for processing in  order to avoid multiple tax bill.
The cybercriminal, using data from the completed form, impersonates the client and contacts the individual’s insurance company. The cybercriminal then attempts to obtain a loan or make a withdrawal from those accounts.
The IRS reminds tax professionals to be aware of phishing emails, free offers and other common tricks by scammers. Those tax professionals who have data breaches should contact the IRS immediately through their Stakeholder Liaison.  Individuals who receive the insurance tax form scam email should forward it to phishing@irs.gov and then delete it. Individuals who completed and returned the fake tax form should contact their insurance carrier for assistance.
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