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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The IRS initiates most contacts through regular mail delivered by the United States Postal Service. However there are special circumstances in which the IRS will call or come to a home or business. Even then, taxpayers will generally first receive several letters from the IRS in the mail.
Note that the IRS does not call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card, or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. Tax payments should be made payable to the “United States Treasury.” Specific guidelines on how to make a tax payment are also listed at www.irs.gov/payments.
The IRS also does not demand that the individual pay taxes without the opportunity to question or appeal the amount the IRS says is owed. The IRS should also advise the taxpayer of his or her rights. The IRS will never threaten to bring in local police, immigration officers, or other law enforcement to have the individual arrested for not paying. The IRS also cannot revoke an individual’s driver’s license, business licenses, or immigration status. Threats like these are common tactics scam artists use to trick victims into buying into their schemes.
If an IRS representative does visit a taxpayer, he or she will always provide two forms of official credentials called a pocket commission and a HSPD-12 card. HSPD-12 is a government-wide standard for secure and reliable forms of identification for federal employees and contractors. A taxpayer has the right to see these credentials when an IRS employee visits a taxpayer in person.
Visits typically fall into three categories:
- IRS revenue officers will sometimes make unannounced visits to a taxpayer’s home or place of business to discuss taxes owed or tax returns due. Revenue officers are IRS civil enforcement employees whose role involves education, investigation, and when necessary, appropriate enforcement.
- IRS revenue agents will sometimes visit a taxpayer who is being audited. That taxpayer would have first been notified by mail about the audit and set an agreed-upon appointment time with the revenue agent. Also, after mailing an initial appointment letter to a taxpayer, an auditor may call to confirm and discuss items pertaining to the scheduled audit appointment.
- IRS criminal investigators may visit a taxpayer’s home or place of business unannounced while conducting an investigation. However, these are federal law enforcement agents, and they will not demand any sort of payment. Criminal investigators also carry law enforcement credentials, including a badge.
Private debt collection
IRS collection employees may call or come to a home or business unannounced to collect a tax debt. They will not demand that the taxpayer make an immediate payment to a source other than the “United States Treasury.” The IRS can also assign certain cases to private debt collectors but only after giving the taxpayer and his or her representative written notice. Private collection agencies will not ask for payment on a prepaid debit card or gift card. Taxpayers can learn about the IRS payment options on www.irs.gov/payments. Payment by check should be payable to the “United States Treasury” and sent directly to the IRS, not the private collection agency.
The IRS has created a special new page on www.irs.gov to help taxpayers determine if a person visiting their home or place of business claiming to be from the IRS is legitimate or an imposter. With continuing phone scams and in-person scams taking place across the country, the IRS reminds taxpayers that IRS employees do make official, sometimes unannounced, visits to taxpayers as part of their routine casework. Taxpayers should keep in mind the reasons these visits occur and understand how to verify if it is the IRS knocking at their door.
Some taxpayers may be required to pay an Additional Medicare Tax if their income is over a certain limit. The IRS would like people to know more about this tax.
- Tax Rate. The Additional Medicare Tax rate is 0.9 percent.
- Income Subject to Tax. The tax applies to the amount of wages, self-employment income and railroad retirement (RRTA) compensation that is more than a threshold amount. For more information, go to Questions and Answers for the Additional Medicare Tax.
- Threshold Amount. Filing status determines the threshold amount. For those who are married and file a joint return, they must combine the wages, compensation or self-employment income of their spouse with their own. The combined total income determines if it is over the threshold for this tax. The threshold amounts are
|Filing Status||Threshold Amount|
|Married filing jointly||$250,000|
|Married filing separately||$125,000|
|Head of household||$200,000|
|Qualifying widow(er) with dependent child||$200,000|
- Withholding / Estimated Tax. Employers must withhold this tax from wages or compensation when they pay employees more than $200,000 in a calendar year. Self-employed taxpayers should include it for estimated tax liability purposes.
- Underpayment of Estimated Tax. People who had too little tax withheld or did not pay enough estimated tax may owe an estimated tax penalty. IRS Publication 505, Tax Withholding and Estimated Tax, provides rules and details on estimated taxes.
People who owe this tax should file Form 8959, with their tax return. People should also report any Additional Medicare Tax withheld by their employer or employers on Form 8959.
If you need further assistance, contact Steve Siesser at firstname.lastname@example.org