TaxMamas TaxQuips: Tax Quips

  On November 2nd, the House Ways and Means Committee unveiled a sweeping tax bill, Tax Cut and Jobs Act, designed to undo many of the complexities of the Tax Reform Act of 1986. Please understand that this is not law yet. There’s still a long journey, with lots of hurdles, before some version of this bill becomes law. Whatever happens, this won’t affect your 2017 tax return adversely. Most provisions will take effect for “tax years after 2017.” In the meantime, let me give you a brief overview of how this law will affect you, starting in 2018. After all, you don’t want the entire 429 page information here, on something that isn’t really a law yet. Please understand, my focus is on individuals and small businesses, only. I will not touch on the large, mult-nationals, and offshore profits at all, though, those provisions are an important factor in balancing the effects of this law. Glossary Some abbreviations we will use are M = Married, S = Single, HOH = Head of Household. AGI – Adjusted Gross Income – the bottom line on the page 1 of the long Form 1040. Nonrefundable credits – the tax credits may only be used to zero out a taxpayer’s tax liability, not to generate any extra refunds. Refundable credits – tax credits will be given to taxpayers in excess of their total tax liability – even if they have had nothing withheld. Tax Credits – they reduce taxes, on a dollar-for-dollar basis. Tax deductions – they only reduce income times your tax bracket.   Tax Brackets – Reduced to 4 brackets – 12%, 25%, 35% and 39.6%. Currently, we have 8 tax brackets – 0%, 10%,15%, 25%, 28%, 33%, 35%, and 39.6%  . (I know, you keep hearing that there are 7. The legislators keep omitting the current 0% tax bracket for the lowest income people!) The lowest bracket of 12% will apply to the income of single people at $45,000, married couples at $90,000 and heads of household at $67,500. The average person with income above those amounts will pay 25% until they reach these thresholds – S to $130,000, MFJ to $260,000, HOH to $195,000. Folks will hit the 39.6% bracket when their income reaches $500,000 for S, $1,000,000 for MFJ and $500,000 for HOH. Impact on you. There will no longer be a 0% tax bracket at all. So that may cause taxes to increase on the poorest taxpayers – if the increased family-related tax credits and increased standard deductions don’t reduce their taxes. Personal Exemptions – all gone. Impact on you. For 2018, your personal exemption would have been $4,150. A family of four would lose $16,600 in deductions. Child Tax Credit – Increased to $1,600 from $1,000 per child under age 17 Impact on you. That $600 increase is designed to balance out the loss of the $4,150 per child. In a 12% tax bracket – that actually works. The refundable portion of $1,000 (to be indexed for inflation) will require a Social Security number. The income level to claim the credit has been increased – $115,000 (S), $230,000 (MFJ)  (possibly, although not specified – $172,500 for HOH) Family Flexibility Credit – New – worth $300 per non-child dependent. It’s temporary – it expires on 12/31/2022. And it’s not refundable. Impact on you. This is designed to replace the personal exemption for the taxpayer, spouse and any other adult (like a parent, girl-friend, college-age child). This still doesn’t really replace the value of the lost exemptions. It leaves a shortfall of about $300 per person. The income level to claim the credit has been increased – $115,000 (S), $230,000 (MFJ)  (possibly, although not specified – $172,500 for HOH) Standard Deduction – Increased to $12,200 (S), $24,400 (MFJ, and $18,100 (HOH) – under current law it is $6,500 (S), $13,000 (MFJ), and $9,550 (HOH) Impact on you. This appears to be a significant increase in deductions you can use without having to report any expenses or save any receipts. This increase is designed to simplify your tax return preparation. This is, essentially, the basis of their “postcard tax return” concept. For people who rent their residences and have jobs that reimburse all their expenses, this standard deduction and the increase in family-related tax credits will keep your taxes about the same as before – with fewer record-keeping requirements. Itemized Deductions – All of them are being eliminated except for mortgage interest and property taxes. Even those deductions have new caps on them. This means, no deductions for moving expenses, employee business expenses, medical expenses, and so on. In addition, entertainment expenses are totally abolished – for business and employees. Tax preparation fees and fees for financial advice are no longer deductible. Note: The current phase out of itemized deductions and standard deductions for high-income taxpayers will be repealed. Not that it matters since we won’t have any exemptions or many deductions left to take. Impact on you. Folks who traditionally have high deductions for medical expenses, job-related costs, and state tax deductions will be hit hard. All those deductions are gone. There is nothing to replace those tax deductions at all. Who will be the hardest hit? The elderly and disabled who don’t have enough insurance coverage, or must pay for in-home care or must live in care facilities. Employees who have unreimbursed travel and meal expenses. Mortgage Interest – folks with current, qualifying mortgages will still be able to take their interest deductions. If you buy a new home starting in 2018, your mortgage interest deduction will be limited to the interest on a loan of up to $500,000 Impact on you. No impact if you keep your current mortgage. But if you refinance, you will only be able to claim the interest on the acquisition debt – probably up to loans of $500,000. The interest deduction is limited to only one principal residence (unlike the two we used to be able to deduct) No deduction will be allowed for home equity debt at all, on new purchases. There is no longer a deduction for the PMI – mortgage insurance They don’t discuss points – but assume that they are only deductible on a new purchase, not on refinanced loans. NOTE: This $500,000 limit applies to all new loans and refinanced loans dated after November 2, 2017! So there is no time to do any refinancing or damage control. Real Property Taxes – limited to a total of $10,000 – regardless of the number of properties involved. Impact on you. Unlike the mortgage interest expense, existing property taxes are not grandfathered. All other state and local tax deductions are gone – which is a bit hit for taxpayers in high tax states like New York, California, Illinois, etc. No effect on the 9 states that have no income taxes, or the few states, like Alaska, that don’t have sales taxes either. Note: Businesses may still deduct all relevant state and local taxes related to their business operations. Charitable Contributions – Still deductible. The limit on deductions rises to 60% of AGI, instead of 50%. There are more complicated provisions, especially with respect to the carryover of unused deductions. Impact on you. For most people, the higher standard deduction will make deducting these donations impossible, since you won’t be able to itemize at all. Impact on charities. Probably a reduction of donations from moderate to lower-income taxpayers. It will practically put a stop to the year-end donations of personal and household goods to charities and thrift shops, since the primary donors will no longer be able to use the deductions. One small piece of good news for those who will still be able to itemize. For the first time in half a century or more, the IRS finally has the right to set the mileage deduction, and to increase it by inflation. It has been frozen at 14 cents per mile because only Congress could change that number. Personal Casualty Losses – gone, except for federally declared disaster areas Impact on you. If you experience a fire, theft, flood or other personal disaster and don’t get insurance compensation for the full amount of the loss – you won’t be able to take a deduction at all. You may need to reduce the deductibles on your various insurances. A real boon for the insurance industry. However, if you are in a disaster area, you will still be able to claim the deductions. Note: This does not impact business casualty losses. Those are still fully deductible. Alimony Expenses – will no longer be deductible at all. Impact on you. Spouses who pay out alimony, child support, or family support will no longer get any tax benefit for the share of the income they give to an ex-spouse. This will definitely cause a re-negotiation of all divorce settlements, since it will be so much more expensive to the paying spouse. Good news: The person receiving the alimony will no longer be paying taxes on this income. So, when the amounts are negotiated downwards, it won’t be as painful. Selling Your Home – in order to avoid paying taxes on the first $250,000/$500,000 of profits, you must now live in the home for at least 5 years out of eight. Impact on you. It’s no longer going to be possible to make a living buying a home, fixing it up and selling it at a profit every two years – and to live tax-free. Adult couples planning marry, who each own homes, might have to sell their homes before marriage, and buy a new home to live in together. Or to do some careful planning about the timing of home sales before and after marriage. More bad news. This exclusion of profits is reduced, dollar-for-dollar, when your AGI exceeds $500,000. (Note: It’s not clear if we must take the excluded profit into account before computing AGI. I hope not.) Education Deductions and Credits – Most have been consolidated into the American Opportunity Credit, with a fifth year of tuition providing an additional credit of up to $500. Impact on you. The Lifetime Learning Credit is gone. A bit of discouragement for folks wanting to continue to improve their skills or learn new skills as their jobs and industries are being phased out. No more deduction for student loan interest. No exclusion from income for interest on U.S. savings bonds. No exclusion from income for tuition-reduction programs. There will be some provisions for relief of debt for student loans that are unpaid due to death, total disability or other conditions. Sec 529 College Savings Plans – New contributions are prohibited. But you may rollover funds, tax-free, from Coverdell plans (like a student IRA). Impact on you. Future college savings will have to be invested in taxable accounts – unless you decide to buy your children whole life insurance policies as early in life as possible. Those funds will grow as you make annual payments. When your child is ready for college, he or she may borrow from the cash value of the life insurance policy with no tax effect. Beneficiaries are expanded so you can designate a beneficiary to be a human fetus. (Yup, it specifies “species homo sapien,” not simian, or canine or ursine, or…) Note: To designate a beneficiary, you must have a name, address and Social Security Number – so that is a rather absurd provision in the proposed law. Funds may be used for elementary and high school costs up to $10,000 Funds may be used to pay for apprenticeship programs And with all of these provisions, if you cannot make new contributions, none of this is really helpful, except to wealthy folks who front-loaded their family’s Sec 529 accounts with five years worth of maximum contributions – and have been funding these accounts since the birth of their children, grandchildren or relatives. Tax-Free Employee Awards – Repealed. Impact on you. Your employer used to be able to give you tax-free awards for achievements or safety each year worth $400 (up to $1,600 per year). They may still give you these awards. But the awards will be fully taxable. Employer-Paid Dependent Care Assistance – Repealed Impact on you. Your employer was able to provide a tax-free benefit of up to $5,000 for dependent care assistance. This is no longer a tax-free benefit. Employer-Paid Moving Expense Reimbursements – Repealed Impact on you. In the past, part of the moving expense reimbursements were tax-free – as long as they were for moving the household and direct transportation of the members of the household. The other relocation expenses were taxable. Now – it’s all taxable. Employer-Paid Adoption Expenses – Repealed Impact on you. In the past, your employer could provide up to $13,570 to help cover your adoption expenses as a tax-free benefit. This was in addition to the tax credit you could take for any expenses in excess of the job-related benefit. This benefit is gone. Note: The tax credit for adoptions will still be available – as a nonrefundable credit. Alternative Minimum Taxes (AMT) – Repealed Impact on you. This was originally designed to ensure the wealthy paid taxes, even after their expensive tax planning was put into place. Instead, the income levels where the AMT took effect, affected taxpayers whose income was barely over the poverty level. For the average person, this is a valuable benefit. However, instead of repealing the AMT, they should have left it in effect at much higher income levels – more like $250,000 or $500,000, instead of the $53,900 (S & HOH) or $83,800 (MFJ). This is a HUGE tax break for the wealthy. Note: Most of the average income people who were affected were those who had high employee business expenses, or home equity interest. But since both of those deductions are gone anyway, the average person would not face AMT even without this provision. Folks with an AMT credit carryforward may be able to use them up, at the rate of 50% per year, starting in 2019 – 2021. Whatever’s left may be fully used up in 2022. Estate Taxes – The exclusion from estate tax is doubled to $10,000,000 per person, indexed by inflation. The estate tax totally phases out in 2023. The top estate tax rate drops to 35% from 40%. Impact on you. Not much really. Since, according the IRS statistics of wealth, only about .34% (that’s about a third of ONE percent) of the population have assets in excess of $5 million dollars. The good news. They did include a provision to keep the step-up in basis intact. Normally, when estate taxes are repealed, that also means that the heirs have to struggle to figure out the tax cost to the person who died. Getting a step-up in basis means that when you inherit something, your tax cost (or basis) is the fair market value (FMV) on the date of death. Gift taxes will still be due on lifetime gifts of $10 million or more, indexed for inflation. The gift tax will be 35% The annual gift tax exclusion will remain as is, currently $14,000 to any one person for 2017, and indexed for inflation. It will rise to $15,000 for 2018. This only covers most of the information in the first 26 pages (out of 82 pages) of the summary of the proposed law, plus the estate & gift taxes and AMT. There are lots more things in there, both good and bad. For more information, you will find some excellent articles and incisive summaries of this law written by folks like Kelly Phillips Erb at Forbes  https://www.forbes.com/sites/kellyphillipserb/ https://www.forbes.com/sites/kellyphillipserb/2017/11/02/how-do-the-proposed-tax-cuts-compare-to-the-2018-tax-rates https://www.forbes.com/sites/kellyphillipserb/2017/11/02/from-mortgage-caps-to-tax-brackets-how-the-house-tax-bill-could-impact-your-taxes/ and Kay Bell blog –  Don’t Mess With Taxes http://www.dontmesswithtaxes.com/ – and her articles at BankRate.com – http://www.dontmesswithtaxes.com/about.html And the House Ways and Means press release announcing this plan can be found here – https://waysandmeans.house.gov/category/press-releases/  

Today TaxMama® wants to talk to you about the latest tax proposal from the House of Representatives. It’s a doozey! Dear Friends and Family, Last week, the House released their sweeping tax reform bill to public view. There’s a lot of excited or panicked chatter about this. Let me gives you a few pertinent facts. And perhaps a few impertinent comments, too. 1) This is not law. It is a proposed (429 page) bill that the House of Representatives must discuss, dissect and vote on – probably in the next two weeks. 2) Once they have passed their version of the law, it will go to the Senate. In the meantime, the Senate is developing their own version of a sweeping tax bill. So, since there will be differences, the law still cannot pass. 3) It will go to the Joint Committee on Taxation – which is composed of members of the House and Senate. They will hash out their differences and produce a final version of the new, sweeping tax law. All of this, if they work rapidly, might get accomplished before Christmas. After all, there is pressure on the Legislature to pass a bill this year. Whether they do or not, here’s something to help you relax and enjoy your holidays. Whatever they do will have very little negative impact on you for 2017. Practically everything in the proposed bill will take effect for the 2018 tax year. There might be a few provisions that extend some tax breaks to 2017 that ended on 12/31/2016. So take a deep breath. Don’t panic. It’s OK for now. You will find a summary of the proposal on this page – http://taxmama.com/?p=14408 . Please look it over to see how this might affect you. Why, since I just told you to relax? Because you have time to contact your representatives in the House and Senate to let them know about provisions that really make you angry. YOU have time to improve the final version of the law – that we do know is coming. The following link will help you reach all the right people.  Talk to STAFF – they have more power than you can imagine. http://taxmama.com/special-reports/call-to-action/ One last thing, once the law does pass, my publishers have asked me to put together a detailed explanation for you. We will be releasing that book first thing next year. To make comments and toss in your own ideas, please drop into the TaxQuips Forum. And remember, you can find answers to all kinds of questions about tax legislation and other tax and business issues, free. Where? Where else? At www.TaxMama.com.  

Today TaxMama® says we are facing Hurricane Irma in Florida, dealing with the devastation of Harvey in Texas – and the biggest fire in Los Angeles history. So let’s talk about the special tax breaks available to you.                                                                                Dear Friends and Family, Generally, whenever a major disaster strikes in the United States, the president issues a declaration – which triggers some special tax breaks and extensions for those in the disaster area. In this case, President Trump has issued declarations for 9 disasters,  since taking office. We know there will be one for Hurricane Irma. But, so far, he has not issued the usual declaration for the Los Angeles – La Tuna fires. (But that’s a whole other discussion.) The most important tax break facing us right now is – additional time. On September 15, we have several things due. The 3rd quarter estimated tax payment for individuals and businesses; the final filing deadline for calendar-year partnerships, S corporations, and trusts (if they were on extension); and certain payroll tax deposits for the previous quarter… Then we have another set of deadlines on October 15th for personal and C corporation tax returns – and the rest of the taxes that are due. Disaster areas with qualifying presidential disaster declarations have additional time to file returns, forms and payments – without incurring penalties. Although interest will continue to accrue. For the most part, the IRS has announced that Hurricane Harvey victims have until January 31, 2018 to file their forms and pay the relevant taxes. Folks in Virginia’s storm areas in July have until November 30, 2017. Victims of Michigan’s June storms have until October 31, 2017. It’s important to look up the information related to your state in order to learn if you are entitled to the special tax breaks. Another valuable benefit of the presidential declaration is to allow taxpayers to report their casualty losses in one of three different years. They can report the loss in the year before the event, the year of the event, or the year when the losses are settled with the insurance company. This makes it possible for you to either get faster refunds, for much needed immediate cash; or to take your losses in the year that gives you the best tax break. For more disaster-related tips – http://taxmama.com/tax-quips/disasters-and-other-pleasant-experiences/ To make comments and toss in your own ideas, please drop into the TaxQuips Forum. And remember, you can find answers to all kinds of questions about disasters and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies to this post in the TaxQuips Forum. Photo by europeanspaceagency

Today TaxMama® says that estimated tax payments are due – and that’s timely information for the “Gig” economy. http://deducteverythingbook.com/   Dear Friends and Family, Here are 15 tips for Uber, Lyft and AirBnB workers and others out there on your own. Some of the information comes from chapters 7 and 8 of Deduct Everything   1) Be sure to track all rental days –  and/or rental hours if you’re doing pet sitting or providing child care or adult care. 2) Buy rental foods and supplies separately from personal supplies – keep the grocery or store receipts and track them. You can scan them directly into your accounting system if you use Xero or QuickBooks 3) When setting up the house to depreciate the office in home, use your basis (purchase price) or the current fair market value (FMV) – but only if FMV is lower. Be sure to deduct the value of the land first, before computing depreciation. 4) YES, if you are renting your home, you MUST claim depreciation – or use the simplified office in home deduction. Which doesn’t give you enough value when you are renting to tenants instead of using a small office area. 5) For Uber or Lyft drivers with an Office in Home, the simplified method is probably a better idea than all the fuss about actual expenses. You can claim up to $1500/ year ($5×300 sq ft) for a separate office area.  https://www.irs.gov/businesses/small-businesses-self-employed/simplified-option-for-home-office-deduction 6) The biggest fallacy of people who get 1099s – you are not an employee – you are in business for yourself. Act like it. After all, you will be paying self-employment taxes of 15.3% on all your net profits. 7) Open a separate business bank account. 8) Make IRS and state estimated tax payments each quarter – the next one is due on Sept 15th 9) You can avoid making estimated payments by raising your withholding if you also have a job. 10) How much should you pay in estimated tax payments? Add 15.3% to your IRS tax bracket  (say 15% = 30.3%) + whatever your state bracket is.  Figure with IRS and state – you should pay about 35% of your profits for the quarter. 11) What’s the best way to pay? Since you don’t have employees, and probably don’t want to go to the trouble of linking your bank account to the IRS’s system (via www.eftps.gov ), use the IRS’ Direct Pay system. It’s free, takes the money from your bank account, provides an instant receipt – and you control where the money is applied – so do it carefully and slowly. Check to see if your state has a similar system.  Of course, you can always use something like www.pay.gov  (you can use bank account or debit/credit card) 12) Tracking mileage isn’t too hard, since Uber has a tool that handles it for you. Lyft doesn’t seem to, so use MileIQ or something similar 13) In all cases, be sure you have all the correct licenses. Generally getting them is inexpensive and easy. But not having them generates penalties. 14) If you have people working for you – be sure to put them on payroll if they really are your employees. Treating them like freelancers will cause you untold problems – from so many different sources. 15) If they are really in business for themselves  have them fill out a Form W-9 to collect each person’s Social Security number or employer ID number, address, and type of business they operate, if they are an entity. Get this before making the first payment to them. Otherwise, you might have to start holding back 30% of their compensation, or get into trouble yourself.   To make comments and toss in your own ideas, please drop into the TaxQuips Forum. And remember, you can find answers to all kinds of questions about gigs and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies to this post in the TaxQuips Forum. Photo by quinn.anya

Today TaxMama® wants to talk about sudden, unexpected events – and some tips on how to prepare for them.                                                                            Dear Friends and Family, Saturday we came home from a delightful evening with friends, only to see traffic lights out half the way home. Then we noticed, all other lights were out. Arriving home, our power was off – except for that persistent beeping sound from the back-up power for our U-Verse devices. No lights, no power, no air conditioning, not even the ceiling fan – on the hottest night of the year. Fortunately, my husband keeps small, powerful LED flashlights all over the house. So we were able to get around, turn things off that would be harmed when the power would surge back on – and perform our nightly ablutions.  For a little while, we still had Internet and learned that a major transformer had exploded (probably from the intense heat) and knocked out 154,000 homes and businesses.  We called it a night, went to sleep, hoping the power would be on in the morning. It wasn’t…but, with DWP working through the night it came back up by 7:59 am. Whew! What I learned: Keep LED flashlights all over the place – they are cheap. Especially this week with Amazon’s Prime campaign – you can get a pack of 18 mini LED flashlights (with batteries) for under $20. Check the flashlights periodically to make sure the battery is charged. The flashlight on my desk lit up for a couple of minutes then went to sleep forever. (And when changing the batteries, don’t lose the little spring between the battery pack and the connection. Sigh.) Avoid using candles – they drip and make a mess. Worse, they can start fires. Keep your devices charged up regularly, while they are not in use. (I forgot to charge my smartphone and was down to 72%. Enough for an emergency, but not much else.) Do go through the house and turn off appliances that are normally set to on. (Or, save time. Turn off the fuses in your fuse box, except for a set that only operates lights – to avoid power surges.) Leaving one set of fuses functioning, you will know when the power comes back on, and can safely re-set all the other breakers. When you’re in an area with frequent outages, get a back-up generator. Make sure it’s always fueled and accessible in the event of an emergency. Teach everyone in the family how to use it safely. This is especially important if you have aquariums or enclosures for animals that require power. Keep an emergency supply pack at home, containing enough fresh water for several days, and non-perishable foods that don’t require cooking. Amazon.com has several earthquake survival kits – for various family sizes. You cannot make coffee or toast the usual way – the toaster, coffee maker and microwave all require electricity. But if you have a gas stove and/or oven, you can boil water for coffee, cook omelets, and toast bread (or make quesadillas) in the oven. Or, you can always use your barbecue outside and invite some neighbors for camp-out coffee and food. Be very sparing about opening the refrigerator. As long as it’s closed, everything in the fridge and freezer is safe. Each time you open it, cold air departs. As evidenced by the Twilight Zone feeling at the supermarket on Sunday, where all the dairy areas were covered and sealed off with warnings that nothing was for sale. But the food in the closed cases was still being sold. When the power comes back on, if you have food or other things that have spoiled, you might be able to file an insurance claim. So photograph all the spoilage to prove what happened. Unfortunately, we cannot record smells. Whatever the insurance doesn’t reimburse, might turn into a tax deduction. (Or not.) For disasters where you face tangible damages, there may be tax breaks for casualty losses. Read more about them here. Note: If there is a major problem that will take days to resolve, consider getting out of the area for a few days. Friends, family or hotels are viable options. Especially if you have health issues and need power for the devices that keep you alive. (Refrigeration for meds/syringes, power for breathing devices, recharging wheelchairs, etc.) Also, to get work done using the Internet, you may need to get some temporary lodging outside the affected area. To make comments and toss in your own ideas, please drop into the TaxQuips Forum. And remember, you can find answers to all kinds of questions about casualties and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies to this post in the TaxQuips Forum.

Today TaxMama® hears from several people who have questions about tax returns for entities they created – but never used. This recent question from Debbie, on behalf of one her clients, is far too common.         Dear Friends and Family, STOP IT! Just flat out STOP IT! Why do you keep forming LLCs, partnerships or any kind of corporation when you’re not really ready to do business? Then, you have these legal entities, with stringent tax filing responsibilities – and you do nothing. Or you start them and operate the business for a while – but don’t file tax returns – because you don’t really know how. And you just simply flounder around trying to deal with it yourself, instead of doing the logical thing – taking the whole to thing to competent tax professional. Instead, you rack up non-filing penalties, like those for partnerships and S corporations. Did you know? “The penalty is $195 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership’s tax year for which the return is due.” And “For each failure to furnish Schedule K-1 to a partner when due and each failure to include on Schedule K-1 all the information required to be shown (or the inclusion of incorrect information), a $260 penalty may be imposed for each Schedule K-1 for which a failure occurs, with a maximum penalty of $3,193,000.” And let’s not forget state penalties. If you’re not going to use the entity you created, you’re done with it, remember to dissolve it or shut it down. That’s so important. Better yet, wait to incorporate or to set up your LLC until after you have your business plan and financing in place. Then establish your business entity and open a separate bank account for it. Yeah, stop operating it out of your own personal account or back pocket. Uh huh. Another brilliant thing tax pros like me are having to fix, when you’re audited. A lot of businesses fail because of sloppy, indifferent and irresponsible practices. Ahhhh….but the ones that succeed! Those start out doing it right in the beginning. With the current economic and administration climate, it’s like the Wild West. This is a GREAT time to start a business and get rich – but you must do some smart planning and then act on your plans. Sure, we have no idea what the tax climate is. But if your business depends purely on the way the tax wind blows – you won’t succeed in the long run, anyway. Instead, find your vertical, target market. Learn how to reach them and how much time and money it will take to be profitable – and lay the groundwork properly. There are so many thing people overlook, that I could write a book about the things you should be doing. Heck! I did. Read it before you start your next business – or to improve your current one. Small Business Taxes Made Easy will help you avoid a lot mistakes and hundreds (or thousands) of dollars in penalties. And it will save you a fortune in taxes. To make comments and toss in your own ideas, please drop into the TaxQuips Forum. And remember, you can find answers to all kinds of questions about forming entities and other tax and business issues, free. Where? Where else? At www.TaxMama.com. Please post all Comments and Replies to this post in the TaxQuips Forum. Photo by Steve Snodgrass Photo by Steve Snodgrass

Today TaxMama® hears from Lue with a question that is more common than you may realize.” A friend who’s been doing work for my husband regularly for the past two years knowingly gave him a false Social Security Number. We were just notified of this by the IRS. He won’t provide us with a real Social Security Number, which I think is so messed up, considering he’s supposed to be a good friend. What can we do so we don’t suffer the repercussions of this?”   Dear Friends and Family and Lue, Frankly, while I know how you feel, it’s not your problem. The IRS sent your husband a notice. It tells your husband to withhold 28% of all money that is paid this contractor. He MUST do this if this man continues to work for him. One of the problems with this withholding is – without a Social Security number, that money won’t get credited to your friend’s income tax account as his tax payment. And if he never files a tax return, HE is throwing this money away. Your husband has no choice in the matter, if this person continues to work for him. If your husband tries to be a good guy and does not withhold the money and send it to the IRS, your husband (and you) will have to pay the friend’s taxes. So suggest to your husband that HE has two choices. 1) Continue to hire his friend and withhold the money. or 2) Stop hiring his friend and get out of this conflict that your husband never created. Good luck with this. I see a fight coming – and perhaps at least 1 broken relationship. I hope it’s not yours. Please drop by MarketWatch.com and the TaxWatch columns for more tips. To make comments and toss in your own ideas, please drop into the TaxQuips Forum. And remember, you can find answers to all kinds of questions about IRS notices and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the TaxQuips Forum. Photo by c.paras

Today TaxMama® wants to talk about Extensions, Payments and End of Tax Season stuff. Dear Friends and Family, Today is April 17th. Don’t panic! Tax season isn’t quite over yet. You have until tomorrow to file your tax return or extension.  Here are some last minute tips. But before I do, let me remind you (and pass this on those friends – you know who they are) that tomorrow is the absolute deadline to file the 2013 tax return and still collect a refund from the IRS. There’s a BILLION dollars sitting there, unclaimed. OK – this year’s tips. (You may have heard or read them before.) Do not file your tax return if you’re not totally ready with all the information. Get an extension. It’s free…sort of. Don’t just skip it until you’re ready. The penalty for filing late is 5% per month, up to 25%. The extension makes those penalties disappear. To get an extension – use Form 4868 for personal extensions. Use Form 7004 to extend gift tax returns and trust or estate tax returns. Most states will accept the IRS extension. But make sure your state complies. When you expect to owe money, but cannot pay it all, don’t lie on Form 4868. Enter the approximate balance you expect to owe. Pay at least $25 or $50 with the extension. (Never lie on the extension or it will be invalid.) If you owe money, you need to pay it with the extension. You can use your credit card – and pay a fee.  Or you can pay online directly from your checking account with no fee using IRS’ Direct Pay. Make sure to select Form 4868 as the form and 2016 as the year you are paying. If you absolutely cannot pay at this time because of a hardship, the IRS has a special form. Use Form 1127 to request an extension of time to pay for up to 18 months. There’s no guarantee they will accept it. But if they do accept this, you will avoid the late payment penalties. You will still owe the interest. April 18th is also the last day to fund an IRA contribution for 2016. And you need to make estimated tax payments for 2017, if you are self-employed or have investments. (Use the same payment links I gave you for the extension – just select Form 1040ES as the form – and use 2017 as the year.) So you have a lot of demands on your money this week. What is the best strategy for allocating your dollars if your financial resources are limited? Read my 2012 Marketwatch column for guidance. The concepts and strategies are all still very valid. But use the links in today’s TaxQuip. Please drop by MarketWatch.com and the TaxWatch columns for more tips. To make comments and toss in your own ideas, please drop into the TaxQuips Forum. And remember, you can find answers to all kinds of questions about tax payments and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the TaxQuips Forum.

Today TaxMama® wants to talk to you about getting your tax returns done – and where to get help.   Dear Friends and Family, It’s the height of tax season. And this year, there is a lot of confusion about a variety of issues. More than ever, you may need the help of a tax professional. Where can you get help preparing your tax returns? Did you know that only 3 states actually have testing, licensing and continuing education requirements for tax professionals? Yup! Only California, Maryland and Oregon. The other 47 states, DC, and US territories have nothing. In fact, there are over 400,000 tax preparers registered to file tax returns electronically who are unregulated (over 57% of all preparers). So how can you ensure that your tax professional IS a professional and is up-to-date on current tax laws, especially in states without licensing? First, start with a credentialed tax professional – there are three: Enrolled Agents, Certified Public Accountants, and Tax Attorneys. Then there are the licensed tax pros in CA, MD and OR. To encourage the uncredentialed tax pros to take classes and to stay up-to-date, the IRS established a voluntary program. After completing 16-18 hours of courses, and for some candidates, a 100-question annual examination, they can get an Annual Filing Season Program (AFSP) Record of Completion. Only 50,951 tax pros out of the 400,000 tax pros without credentials have taken the courses. That means, over half the tax pros in the country have no license, and might not have bothered to keep up with changing tax laws. The IRS’s directory of tax professionals will help you look up your tax pro. You will be able to see if their license, credential or AFSP is in good standing. You will be able to locate them by name or ZIP code. But you will not find and address or contact information for them. (The 350,000+ unlicensed and un-AFSP’d tax pros are not in the directory.) https://irs.treasury.gov/rpo/rpo.jsf How do you find the right person to help you? And which is right for you? Enrolled agents (EAs) are tax specialists licensed to represent taxpayers before the IRS. The EA credential allows them to work anywhere in the nation. For tax planning and tax debt issues, bookkeeping and payroll, this is your best choice. You can find them at the National Association of Enrolled Agents (NAEA), http://taxexpert.naea.org/ Certified public accountants (CPAs) are authorized to perform certified audits and issue financial statements. If you have a complex business and need much more than just tax returns – work with a CPA. You can find them the American Institute of Certified Public Accountants (AICPA), http://www.aicpa.org/feedback/shortfb.htm Tax Attorneys are excellent choices if you need to create trusts, set up contracts and minutes, or deal with courts or criminal issues. They are usually too expensive for routine tax returns. You can find them at the American Bar Association http://www.americanbar.org To decide if you’re better off preparing your own tax return, or working with a tax pro, read chapters 3 and 4 of Deduct Everything! http://deducteverythingbook.com/ If you’re in business, you will find more details about building an advisory team in chapter 1 of Small Business Taxes Made Easy. http://yourbusinessbible.com/ Please drop by MarketWatch.com and the TaxWatch columns for more tips. To make comments and toss in your own ideas, please drop into the TaxQuips Forum. And remember, you can find answers to all kinds of questions about tax filing and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the TaxQuips Forum. Photo by Got Credit

When two people fall in love, they tend to be blind to life’s realities. The last thing they want to do is bring up issues that might generate conflict, and let’s face it, the topic of taxes is definitely turbulent. Ask these tough tax questions before you get married – to avoid an inevitable divorce. After decades of working with people in tax trouble, I have learned that financial misunderstandings are the root of all evil. They generate tax problems, budget problems, bankruptcies, divorces, and flat-out nastiness. This is especially true when both partners are not truthful before marriage. For instance, a friend of mine married a man who had neglected to tell her a few important things about his finances. He had an outstanding IRS tax lien for over $10,000 left over from his previous marriage. Because my friend and her new husband had comingled funds, the IRS took the money from her bank account. Although my friend’s husband claimed to be an executive, he had not had a stream of income for some time. He ended up dissipating all her assets, including a substantial inheritance. Fortunately, you can protect yourself by asking a few key questions and by requesting your prospective spouse’s permission to get some important financial reports on him or her. You should share the same information with your spouse-to-be: File a Form 4506T request with the IRS for each of you. Request a copy of Form 1040 on line six, check all the boxes on the form, and enter the last four years on line nine (i.e., 2015, 2014, 2013, 2012). Or, you can log into the the IRS’s Get Transcript system with your fiance’(e) and get the information on the spot. When you send the form back to the IRS, the agency will send you the tax forms for the years you requested, and you’ll know if your future spouse has filed tax returns in the last four years. You’ll also learn whether he or she owes the IRS any money. If you fear that your soon-to-be spouse may owe outstanding balances for more than the past four years, you can request the last 10 years’ data. Each order your own Equifax credit report to share with the other. Consider opting for a report that gives you information from all three nationwide credit reporting agencies. Doing so will alert you to liens, levies, a poor credit history, and more. Once you have these reports in hand, it will be easier to start the money conversation. Thoroughly read the information in the reports and ask questions about anything you don’t understand, but don’t be hostile or accusing. Ask the right questions. It’s important to be on the same page with your partner before you tie the knot. If your answers to the following questions differ, discuss your points of view rationally. What is your attitude towards money? Are you frugal, stingy, wasteful, or balanced? Do you gamble? How? Do you gamble online or in casinos? Do you make bets with friends? Do you owe any gambling debts? Are you willing to live on a budget? What big purchases are you itching to make in the next few years, and how do you plan to pay for them? Do you have child or spousal support obligations? Do you meet these obligations on time? How are your relationships with your ex and your children? How will those relationships impact our lives, financially and emotionally? Is there any reason why we might have to keep our finances separated, at least in the beginning? These are just some questions to bring up. Sit and think about things that matter to you and make a list that works for your situation. That way, you’ll be prepared to have a calm and rational conversation. I do hope it works out!

Today TaxMama® wants to address several issues that are confusing people this year – or important for you to know. Dear Friends and Family, We are getting a great many questions this year. These are some of the important issues we are seeing.   ACA Penalties – You probably know that President Trump signed an Executive Order (EO) that appeared to wipe out all the ObamaCare penalties. Well, it doesn’t quite work that way. Congress still has to write changes to the various laws that are affected. And the IRS still has to issue procedures. When all that is done, your tax software will incorporate the changes and make it possible for you to get your penalties canceled. In the meantime, if you face 2016 penalties, put your tax return on extension and wait. Or file your tax return to get your refunds, less your penalties. You might be able to amend later to get a refund for the penalties you paid.   Incorporating or setting up LLCs, then not having income – folks, when you set up an entity, please be prepared to use it – or don’t set it up until you’re ready. Once you’ve set up an LLC, partnership, corporation or whatever, you are on the hook to file a tax return each year. Even if you have no income, or no activity. And if your state (like California) requires an annual fee, you must pay that each year, or face increasing penalties. So, please, think before you entitize.   Premature deposits into IRAs, HSAs or other tax deferred or retirement accounts – make sure that your income doesn’t disqualify your deposits to these accounts, right away. If you have over-contributed, draw the money out before April 18th or re-characterize them as 2017 deposits. Otherwise, you might face penalties, which start at 6% of the excess contribution – and increase over time.   1040NR and other visa and immigrant-related questions. So many of you have questions about these issues. Thank goodness we have folks like Jean Mammen, EA, Mike Reed, EA and “Uncle” Bill Porter, EA to answer these particular questions. While we try to answer them all, I urge you to buy a copy of Jean Mammen’s book, “ 1040NR? or 1040? U.S. Income Tax Returns for Visa Holders +: International Organization and Foreign Embassy Employees.” It will guide you through the steps you need to take to prepare your own tax return.   Please drop by MarketWatch.com and the TaxWatch columns for more tips.   To make comments and toss in your own ideas, please drop into the TaxQuips Forum.   And remember, you can find answers to all kinds of questions about changes in the tax laws and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the TaxQuips Forum.

Today TaxMama® wants to remind you about last-minute steps to take before 2016 ends. Dear Friends and Family,   The Electoral College has confirmed our new president-elect. So we can expect some changes next year. You can view an outline of what to expect next year, here.   For now, we still need to take care of some of the routine things. Here are some quick steps:   Make your charitable contributions before year end. Note: Remember to look up the charity to see what they do with your donations. The Foundation Center is a good source of information. For instance, the president of the Salvation Army receives no compensation (see page 7). While the president of Goodwill Industries is receives over $700,000 in compensation (see page 73). Clean out your closets and make a list of all the things you are taking to your favorite thrift shop. Make your final cash contributions. If you are age 70 ½ or older, remember to draw your Requirement Minimum Distribution (RMD) from your retirement accounts. There are substantial penalties if you don’t draw the money in time. You are entitled to draw up to $100,000 from your retirement account and transfer it directly to your charity. This would make it possible to take your RMD without paying taxes on the amount. But you won’t get a deduction for the contribution. Folks with too much money in their IRAs or retirement plans should consider transferring the funds to their Roth IRAs, or cashing some of the money out. Do some computations to see how much you can transfer at your lowest possible tax rate. Balance out your brokerage accounts. Are there any gains or losses you can harvest? And are you in a low enough tax bracket that your capital gains will be taxed at 0% or 15%? Prepay certain routine bills. Pay your January mortgage payment late in December – so your payment covers most of the month’s accrued interest expense. Pay your full property taxes, not just half. If you owe state taxes, make your 4th quarter payment in December. Folks who are in business or use employee business deductions: Delay your invoicing until January, so you can move income into next year. (No constructive receipt) Make your major equipment purchases before the end of the year. Prepay January’s expenses, dues, etc. before the end of December. SSNs and ITINs – make sure that you have ID numbers for all eligible people in your household BEFORE filing your 2016 tax returns. Without them, you stand to lose tax credits and tax benefits. Health insurance, get insurance in place for all household members for 2016. Penalties are high without coverage. Don’t count on Obamacare to disappear for 2017.   For much more detail, tax professionals can sign up for the CPE Link Tax Update workshops – discount still good until December 30. Everyone else, drop by my column at MarketWatch.com and the TaxWatch columns.   To make comments and toss in your own ideas, please drop into the TaxQuips Forum.   And remember, you can find answers to all kinds of questions about changes in the tax laws and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the TaxQuips Forum .

Today TaxMama® wants to give you an advance peek on what you can expect from a Donald Trump tax plan, coming to a Congress near you! To read the details, please drop by here: TaxMama.com

Today TaxMama® hears from several people in the TaxQuips Forum with questions about expired refunds. Let me summarize. “I faced a hardship and didn’t file tax returns for several years. Now, I learn that I cannot get my refunds for all those years. Can you help?” Dear Friends and Family, My answers to Dustin and to DParker don’t bring much hope. They do have heartbreaking stories. And I truly wish I had a solution. But here’s the problem. Even the IRS doesn’t have discretionary control over this matter. These r[s3audio s3url=”http://taxmama.audioacrobat.com/download/taxmama-Expired_Refunds.mp3” /]efunds that have expired, due to the statute of limitations, are controlled by laws passed by Congress – they folks you vote for. You need to get in touch with your legislators to get them to make the law more sympathetic. The tax code doesn’t provide a way to get those refunds from closed years. When we talk about a ” statute of limitations,” the word “statute” means LAW – in this case IRC 6511. For future reference, please don’t put off filing your tax returns – no matter how sick or depressed you are. Family and friends, please keep an eye on those you love and help file their tax returns. They don’t need to be totally accurate. If some information is frustratingly elusive – make good estimates and attached a statement to the tax return that this has been done. After all, you have three years to correct the tax return. In the meantime, you save the refund for that year – which would otherwise be lost forever. What can you do if it IS lost? There IS one thing I would try. You have nothing to lose. Contact the Taxpayer Advocate Service and see if there is any way they can help you. Sometimes, in extreme situations, they can pull a rabbit out of a hat. And their service is free. I truly wish you-all luck! To see the rest of this discussion, please drop into the TaxQuips Forum. And remember, you can find answers to all kinds of questions about unfiled tax returns and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum

Today TaxMama® hears from ASquare in the TaxQuips Forum with this question. “I work as a full time employee for a company on W2. I own S-CORP that i get income for the services provided in my free time. Do I need to run the payroll for that money earned on S-CORP or can I claim it as distribution at the end of the year?”       Dear ASquare, This is a very common issue that people really should think about before forming S corps or LLCs – but often don’t consider. Hmmm…is your S Corporation showing a profit? If so, you need to be on payroll if you want to avoid an audit. These days, the IRS is not wasting time on unprofitable audits. They are focusing their energy on audits they know will generate revenue. And when it comes to profitable S corporations, the IRS knows that the probability of generating additional taxes is 100%. So, in short, yes, if you want an S Corp – run it properly. If you don’t want to bother with the inconvenient technicalities, dissolve the S Corp and run a sole proprietorship. Get business liability insurance if you’re concerned about lawsuits. And remember, you can find answers to all kinds of questions about S Corporations and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link - it’s free!] Please post all Comments and Replies in the new TaxQuips Forum