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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.

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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.

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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.

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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.)

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Tax Reform – The New and Improved Standard Deduction

Then, the good news for many filers is the nearly doubled standard deduction.  Most tax policy wonks estimate more than half of all Schedule A filers will now happily take the standard deduction for federal purposes.

$24,000         Married/Joint

$12,000         Single and Married/Separate

$18,000         Head of Household

Formerly, you had a deduction, and an exemption.

Your itemized deduction included state income taxes, home mortgage interest and real estate taxes (for up to 2 homes) plus charity, medical (within limitations,) and certain business expenses (within limitations,) among other things.  State and local taxes (SALT) now have a limitation of $10,000.  This applies to your state income taxes, any sales tax, personal property taxes, and real estate taxes.  Limiting this to $10K hurts a lot of people.  However, the powers-that-be felt the new limit contributed to a leveling of the playing field.  We shall see.  I do know a lot of DIY people did not understand Schedule A, and mistakes were very common.

Also changed – you can no longer take a deduction for your investment fees, your tax prep, or your employee business expenses.  Granted, most regular folks never got this deduction because even if they filled out the forms, the amounts did not go over the threshold.  But it was apparently fun trying.

Some people will still itemize!  I expect seniors will still have heavy medical expenses, and some people will still be extremely charitable.  They talked about limiting charity, but they did not do it.  (Yet.)  Some people are reorganizing how they give so as to improve their tax situation.  Example:  Give a whopping amount every second (or third) year so as to itemize, but then slack off to the standard deduction in the off years.

As for that exemption – well, it’s just gone, too.  No more multiplying by all the people you managed to cram into your tax return.  Instead, there is an increased $2000 deduction for each child under age 17, and they’ve added a $500 “Other Dependent Credit” for miscellaneous other dependent relatives.

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Tax Reform – The Forms

The forms were restructured.

All people now file on the same Form 1040.  No 1040-A.  No 1040-EZ.

There is rumor of a new form for seniors (1040-SR,) but nobody really knows why.  If both rich and poor non-seniors can file on the same 1040, why can’t rich and poor seniors file on the same 1040.  Maybe 1040-SR will have larger type?  Or bigger spaces to write in?

What happened to the postcard?  Think about it – do you really want your SSN sent by postcard through the mail?  Ted Cruz may be a helluva guy, but this was not a good idea.

Instead, we have 2 half-pages, which are thankfully being printed on 1 side of 1 piece of paper.

The top half is the demographics, in this order:

Your filing status

Your name and SSN

Your spouse’s name and SSN

Your address

Your dependents with SSN, etc

Your signature (and mine)


The second half of the page is a quick recap of your income, and how it’s taxed.

The most basic income information (totals for wages, interest, dividends, IRAs and pensions, and Social Security benefits) comes first.  The rest of the information has been organized into 6 sections, which are called Schedules 1, Schedule 2, Schedule 3, Schedule 4, Schedule 5, and Schedule 6.  (Clever.)  Pretty much all of the forms and schedules we used to file have been coordinated into these 6 schedules, and their totals flow to the second half of the 1040 page.

But some information appears on its own line, with no help from a newly numbered Schedule.  This includes your deduction (standard or itemized,) the new QBID, any withholding totals, and various refundable credits, plus the math.  I think they could have done a better job.

It is interesting to note that they managed to highlight the refund section by putting the word “Refund” in large, bold type, offset to the left, while they downplayed any amount you might owe by using a smaller font and tucking this information at the very bottom.

And did you notice the very first line, up at the top, was your filing status?  Now we know what they’re really interested in.

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Tax Reform – Intro

Tax Reform – Like it or lump it – it’s the law. 

Late December 2017, Congress gave the American people the most far-reaching tax code changes since income taxes were first shoved down our throats created.  They changed forms, rules, and thresholds.  Some cherished provisions were wiped away, and new twists were created.  Some changes are “permanent” while others are “temporary.”  In my opinion, now that congress has a taste for tax-law tinkering, nothing in tax law will ever be permanent, and I fully expect each new administration – state and federal – to take a swipe at it.  Be that as it may, our government is still issuing guidance on various provisions.

And so we begin a series on Tax Reform.  Not everything…just the HIGHLIGHTS that impact my people, and just the broad strokes because if you really want all the details, you may as well read all 400 pages of the Tax Cuts and Jobs Act of 2017, and then move on to the hundreds of additional pages of guidance issued (and still being issued) by the Internal Revenue Service.

Most people just want to know what it means in practice, and so that is our focus.

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LLC? LLP? Partnership?

Food for thought for the would-be entrepreneur (part 7 in a series)

A long, long time ago, a person who started a business was a sole proprietor, and 2 or more people who shook hands to begin a business were partners.  (And nobody was a “member.”)

A partnership happens spontaneously anytime 2 people, together, buy a house to flip – or begin any other money-making venture.  A partnership does not necessarily have “LLC” after its name, but it can.  It can also have “LLP” (limited liability partnership.)  A partnership does not even need a legal filing, though it would probably be a good idea.  That is, the group really can just shake hands and start the business.

The distinction between multi-member LLC and partnership is very small, and as far as I can tell, functionally irrelevant for tax purposes.  Most partnerships now register with their state and get the all-encompassing FEIN.  Most partnerships also formally establish themselves as LLCs.  (or LLPs.)

The real difference is fundamentally the paperwork prepared (and signed!) in advance.  Without any paperwork, that is, without any partnership agreements, a group of 2 or more people who start a venture with a profit motive are depending upon the laws of their state to work out any issues and to determine who has what responsibilities and who gets what money.

Consider this:  Kjeld and Knud shake hands on a house-flipping venture.  If Kjeld wanders away and leaves Knud to finish the job, but there is no paperwork, the state could still determine that Kjeld gets half the proceeds of the eventual sale.

Furthermore, if the money trail is non-existent, or comprised primarily of commingled receipts, Knud might not even be able to reimburse himself for all the supplies and materials he paid for from his own funds.

Bottom line:  visit a lawyer!  If you can’t afford a few hundred dollars to protect yourselves from each other, you aren’t ready to go into business.

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