Tax Filing Reminders
Looking ahead: Tax reform in 2018
Mileage rates for 2018
The best way to avoid an audit: Preparation
Alimony or child support? A big tax difference.
January 16: Due date for the fourth installment of 2017 individual estimated tax.
January 31: Due date for employers to furnish W-2 statements to employees, and to file Forms W-2 with the Social Security Administration (both paper and electronic forms).
Due date for payers to provide most Forms 1099-MISC with non-employee compensation in box 7 to recipients and to the IRS.
Employers must file 2017 federal unemployment tax returns and pay any tax due.
Due date for providers to send Forms 1095 to recipients and the IRS.
Congress has passed tax reform that will take effect in 2018, ushering in some of the most significant tax changes in three decades. Here are some major items in the new bill that impact individual taxpayers.
• Reduces income tax brackets. The bill retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent.
• Double standard deductions. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.
• Limits itemized deductions. Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
• Caps state and local tax deductions. State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
• Caps mortgage interest deductions. For new acquisition indebtedness, mortgage interest will be deductible on indebtedness of no more than $750,000. Existing mortgages are unaffected by the new cap as the new limits go into place for acquisition indebtedness after Dec. 14, 2017. The act also suspends the deductibility of interest on home equity debt.
• Limit on theft and casualty losses. Now only available for federally declared disaster areas.
• No more 2 percent miscellaneous deductions. Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.
• Cuts some above-the-line deductions. Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019. Weakens the alternative minimum tax (AMT). The bill retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
• Bumps up child tax credit, adds family tax credit. The child tax credit increases to $2,000 from $1,000, with $1,400 of it being refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
• Expands use of 529 education savings plans. Qualified distributions from 529 education savings plans, which are not subject to tax, now include tuition payments for students in K-12 private schools.
• Doubles estate tax exemption. Estate taxes will apply to fewer people, with the exemption doubled to $11.2 million ($22.4 million for a married couple).
• Reduces pass-through business taxes. Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.
Contact us for assistance.
The IRS recently announced mileage rates to be used for travel in 2018. The standard business mileage rate increased by 1 cent to 54.5 cents per mile. The medical and moving mileage rates also increased by 1 cent, to 18 cents per mile. Charitable mileage rates remained unchanged at 14 cents per mile.
Remember to properly document your mileage to receive full credit for your miles driven.
Getting audited by the IRS is no fun. Some taxpayers are selected for random audits every year, but the chances of that happening to you are very small. You are much more likely to fall under the IRS's gaze if you make one of several common mistakes. That means your best chance of avoiding an audit is by doing things right before you file your return this year. Here are some suggestions:
Don't leave anything out. Missing or incomplete information on your return will trigger an audit letter automatically, since the IRS gets copies of the same tax forms (such as W-2s and 1099s) that you do.
Double-check your numbers. Bad math will get you audited. People often make calculation errors when they do their returns, especially if they do them without assistance. In 2016, the IRS sent out more than 1.6 million examination letters correcting math errors. The most frequent errors occurred in people's calculation of their amount of tax due, as well as the number of exemptions and deductions they claimed.
Don't stand out. The IRS takes a closer look at business expenses, charitable donations and high-value itemized deductions. IRS computers reference statistical data on which amounts of these items are typical for various professions and income levels. If what you are claiming is significantly different from what is typical, it may be flagged for review.
Have your documentation in order. Keep your records in order by being meticulous about your record keeping. Items that will support the tax breaks you take include: cancelled checks, receipts, credit card and investment statements, logs for mileage and business meals, and proof of charitable donations. With proper documentation, a correspondence letter from the IRS inquiring about a particular deduction can be quickly resolved before it turns into a full-blown audit.
Remember, the average person has a less than 1 percent chance of being audited. If you prepare now, you can narrow your audit chances even further and rest easy after you've filed.
Contact us for more information.
If you are divorced and have young children, there's a good chance that you are paying or receiving alimony or child support (or both) under a divorce decree. What's the difference? The distinction is important to the IRS. Currently, alimony is deductible by the party who pays it and taxable to the party who receives it. Child support is neither deductible nor taxable.
Depending on what side of the fence you're on, you should negotiate for payments to be characterized as either "alimony" or "child support" as part of a divorce agreement.
How to qualify for alimony deductions Just saying that payments are alimony won't suffice. According to the IRS, these are the requirements that must be met if you're hoping to qualify for alimony deductions:
• Payments are made in cash or an equivalent
• Payments follow the instructions of a divorce or separation agreement
• The agreement doesn't designate the payment as not being alimony
• You and your spouse aren't members of the same household when the payment is made
• There's no liability for making the payment after your spouse dies
The following alimony payments aren't considered deductible:
• Non-cash property settlements in a lump-sum or installments
• Payments that are a spouse's part of community property income
• Payments to keep up the property owned by the person paying alimony
• Use of the property owned by the person paying alimony
• Voluntary payments
The terms can often be worked out to the satisfaction of both parties. For instance, the deduction for alimony can be valuable to someone who pays alimony and earns more while the taxable income may not cause any dire consequences to someone who earns less.
According to the new tax bill, alimony will not be deductible or taxable starting in 2019. This may also affect divorce and separation agreements executed in 2018 and modified in 2019 and beyond.
Keep these rules in mind when your 2017 tax return is filed. We can help you determine tax issues related to your alimony payments. Contact us.