Tax Reform – Depreciation
Business owners may also be curious about this year’s changes to depreciation.
Basically, all thresholds were raised, so you can pretty much find a form of accelerated depreciation to suit whatever you want to buy.
Passenger automobiles, however, see new limits: Year 1 is max $10K, or max $18K with bonus depreciation, but these amounts must be (1) prorated between business and personal use and (2) given back when personal use falls below 50%. This is a definitely important if you are nearing retirement.
Tax Reform – QBID – Section 199A
If you run a business, you are probably interested in Section 199A, also sometimes called QBID (Qualified Business Income Deduction.)
Leaving the politics aside, the basic provision – with many, many interlocking conditions – is a deduction of as much as 20% of your net business income before the calculation of income tax. Thus, if you file Schedule C, own a rental property or farm, or you receive a K-1 from a partnership or sub-S corp, you might get a little excited.
But not too excited! The calculation is convoluted, and manages to limit the actual deduction in most cases. It is important that the owner be actively involved in the business, a condition that has only spurred additional questions which the IRS is still trying to answer. What is active? What’s a business?
Then, depending on your industry, there is an income phase-out which has generated even more questions.
Finally, self-employment tax does not enjoy this deduction.
It would be easy to write about this one for pages and pages – and many people already have. However, it is difficult to write about this one without getting into politics and/or opinions. So let’s just take it on a case by case basis and try not to raise our collective blood pressure.
Tax Season 2019 – New Jersey
And the biggest news on the state front is…
More and more states are finding new ways to line their coffers without raising tax rates, and much of this emphasis involves sales tax. NJ has joined the list of states that REQUIRE you to deal with use tax in conjunction with your annual income tax filing.
Some examples will help.
Remember that vacation you took to that other state with a lower sales tax rate? How about that big ticket item you drove all the way to Delaware to buy? Technically, your duty-free European vacation and your garage sale finds need to be added in. And don’t forget all those nifty online purchases. In short, if you somehow managed not to pay any sales tax, or you paid less sales tax someplace else, NJ insists you pony up the difference to NJ in the form of “use tax.”
There has always been a box on the form where you could voluntarily submit this money, but now, I can’t file without checking it off. Which means I can’t file without you signing more compliance paperwork. And the language is clumsy. You get to choose between three options:
*1* certifying no use tax is due
*2* declaring you kept poor records and cannot substantiate anything, and therefore are willing to allow NJ to assess your use tax at according to a schedule
*3* providing specific information so that your use tax is precise (and possibly less than option 2)
Did anybody out there keep all their receipts for 2018 so they could tabulate the sales tax paid and reveal the actual use tax due?
If you read the questions carefully, you will be able to add back for cities/states where you paid more sales tax. I suspect the whole thing is really about the fines and penalties, both on you and on me, for failing to check all those boxes.
New Jerseyfornia has also established its very own health insurance mandate…but that’s for 2019 so let’s not borrow trouble. This year, all I have to do is ask you if you have health insurance at the time we file.
On the bright side, you no longer have to sign a specific form giving me permission to actually file your NJ taxes. My opinion? Since NJ doesn’t get any revenue from asking you to sign that form, they are willing to piggyback on the federal form. At least we’re saving trees.
Tax Reform – Compliance
A more complex result of tax reform is a re-invigorated emphasis on compliance.
You, the taxpayer, can’t just say, “I’m HOH” or “my mom is my dependent.” You are expected to follow the rules and be able to document and prove the truth of certain statements.
EIC, CTC, AOTC, ODC, AOTC and HOH, all deliver great tax advantages. Electing any of these without proper cause is considered fraud, and these frauds have been running rampant in recent years. Some estimate 1 out of every 3 EIC claims is fraudulent. Most returns with EIC also involve at least one more of these acronyms.
To fight back, there are penalties. In fact, if you lie to me, the IRS can fine me, too. Thus, if you qualify for EIC, CTC, AOTC, ODC, AOTC and/or HOH, and you file your taxes through a professional, be prepared to complete and sign additional paperwork that outlines the qualifying factors. Fun stuff for all of us.
The IRS has stepped up investigations of preparers who have high numbers of taxpayers taking these credits. Once they find a preparer with inadequate documentation, they fine the preparer, but there is little evidence they follow up with the actual taxpayers.
DIY? Apparently nothing has changed on the compliance front. Hmmm.
Tax Reform – Health Ins … still a “thing”
How about that health insurance issue?
Yes, they did repeal the “individual mandate,” but it does not go into effect until 2019. This means, you are still supposed to have health insurance or pay a penalty with your 2018 income tax filing, so I still need your 1095 A/B/C. (Why did Tax Reform delay this until 2019? Probably because folks had already signed up, and they didn’t want to jeopardize the industry mid-stream.)
However, with the 2019 penalty gone, it seems people have begun canceling coverage. That is, enrollment is dropping. Some of this might also be connected to the surge in politicians (particularly 2020 presidential contenders) who are already getting aboard the universal health care bandwagon.
But don’t worry – more and more states are implementing health insurance mandates, complete with the same penalty structure for non-compliance.
Tax Reform – Kiddie Tax
Another big change impacts Kiddie Tax.
Tax rates for dependent children with unearned (non-wage) income are no longer determined in conjunction with the parent return. Instead, Kiddie Tax will simply mimic the rates for trusts and estates.
Generally, this will be simpler.
And unless your child is an oil baron with a trust fund, it will probably result in less income tax.
Tax Reform – Partnerships – CPAR
Have a Partnership?
You may be sad to hear how the IRS has been failing to audit you. While they manage to audit about 27% of large corps, they only get around to about 0.8% of large partnerships. The income/loss is generated by one entity, but taxed at multiple others. If your partnership makes a boo boo, they then have to investigate you and all your buddy partners to recoup that tax money. This is neither fun nor efficient. So, in an effort to produce an estimated $9.3 billion/year, the IRS has now developed the “centralized partnership audit regime” (CPAR.) Unless you elect out, annually, if the IRS finds that boo boo, they can assess taxes directly to the partnership at the top rate, like a C-corp. Ouch. Interested in an off-ramp? Let’s talk. PS States are looking for their own CPAR band wagons.
Tax Reform – AMT got a makeover!
Some taxpayers will be delighted to hear that AMT finally got a makeover!
In 1969, 155 taxpayers with incomes over $200K did not pay income tax, there was public outrage, and 10 years later, the Alternative Minimum Tax (AMT) was born. Yup. It took 10 years! Today, we change things virtually overnight. (And sometimes, retroactively…but don’t get me started.)
In 2017, AMT hit 5.2 million taxpayers, many with solid middle class incomes and lifestyles. This was never the intent of AMT, but simply the result of bad math and unexpected inflation.
For 2018, the estimate is that only about 200,000 people will get hit with AMT. The math is still crazy, so let’s just be glad you probably no longer have to worry about it. (Well, most of you, anyway.)