SaraEA

Got a message from a client today and had to deliver BIG bad news. Face it you naysayers, this tax bill is going to pass just as soon as the writers remove the things in it that aren't related. My client lives and works in NYC, rents so really has no deductions except charities and state and local taxes. Those taxes amounted to $90k in 2016 and will be a bit higher in 2017. In 2018 they will be limited to $10k, so the couple won't even itemize. Going from 39.6% to 37% tax rate isn't going to make up that difference.

All I see so far is that the medical expense deduction for 2017 and 2018 will go back to amounts above 7.5% AGI. Under current law, for 2017 forward the threshold was to be 10%, even for those 65 or older.

I think we're all getting confused about when taxes are imposed and the due date. For property taxes, if you already have the bill the taxes have been imposed. You can pay them anytime you want up to the due date. In our state RE tax bills are sent out July 1. You can pay them all at once or half by July 31 and half by Jan 31. In FL, RE tax bills are sent out in November and are due by the end of March. In both cases, the taxes have been imposed. I am definitely going to pay my RE bill due in Jan by the end of the year. After all, I could have paid it all in July if I was so inclined. As for ES payments, the IRS uses quarters and as far as I know so do the states. The taxpayer self-assesses his or her tax liability and typically pays it quarterly. Some people make one payment in April so they don't have to remember it three more times. Some go away for the winter and make their forth-quarter payment in December so it doesn't get forgotten. The payment is due by the end of the quarter, but that doesn't mean it has to be paid the last day. It can be paid anytime during the quarter. Think about it: If someone makes their 3rd quarter ES on Sept 16, it's applied to the 4th quarter. Although the tax is self-imposed, I would say it is due anytime during the quarter. I am making my final state ES payment in Dec, two whole weeks before the due date.

I've been to a couple of tax seminars this year where it was stated that even if a company is out of business, you can continue to file the Sch C/1065/1120 and claim lingering expenses like loan payments, vendor payments etc. In your case was the last 1065 marked final? If so, amend it and unmark the box for final return. Then continue to file using the line for UPEs.

Interesting how the insurance companies play this to their advantage. We all know that IRS often waits 18 months to send notices. (If they wait longer they have to pay interest if the audit results in a refund.) Our state waits the full three years, just letting those penalties and interest add up. Also, when the IRS changes a return preparers often forget to amend the state; the state finds out a couple of years later and sends a notice, with lots of interest and penalties tacked on. Our state DRS official actually pleaded with us at a liaison meeting to remember to amend the state return because a lot of people get hit with fees for being very late. Looks like if you change insurers, you end up being uninsured for issues that haven't even come up yet but occurred when you had that insurance. What a racket.

Your present insurer won't cover prior years when you ALREADY PAID insurance premiums for those years? What kind of insurance is that?

Our IRS liaison advised us to set up a separate email account we only use for IRS stuff. Then all the junk from CE providers, scammers, "clients" we never heard of sending us links to their tax docs, etc. will go to that one place. Check it every so often for legit IRS email--usually nothing more than infrequent reminders to renew PTIN, etc. Sounds like a plan, except that our current email addresses are already out there and the marketers and thieves already have them. It is unlikely they will purge their lists, so starting an "IRS only" account will only keep new creeps away. Same with charities. A relative who died 10 years ago and who never lived at our address but did have some mail sent here still gets pleas from charities.

Be careful about what is saved to the thumbdrive. One of our business clients was just a victim of ransomware. Her computer was set to automatically save to the thumbdrive every night. Problem is they left the thumbdrive attached to the computer all the time. When the back up ran that evening, it backed up the ransomware hidden on her computer and her carefully saved data were gone.

I know that many of us actively ignore proposed tax changes and wait until the actual tax law changes. Right now both houses of congress have passed tax bills that will now go to conference committee to reconcile differences and then a unified bill will be voted on by the full House and Senate. The odds of it passing there are high IMO, because there is pressure to present this big "Christmas present" to taxpayers. This is not a present at all to those of us who will not have time to give our clients sound tax advice for THIS year. I got to thinking about this when considering my own tax situation. The two current bills have some identical and similar parts that will undoubtedly become part of the final bill. The standard deduction is nearly doubled, no deduction for state and local income taxes, either no or capped deduction for property taxes, the elimination of exemptions. Since it is likely I will no longer itemize, I decided it will be best for me to pay my property taxes that are due in Jan by the end of this year, and I might as well pay my final state ES in Dec too. Then it hit me that many of clients might benefit from the same plan. Before offering that advice, I'd have to check if paying these items early would throw them into AMT, if they have enough other deductions to continue itemizing, etc. To give sound advice would mean going through all of their returns--impossible in the short time we'll have once the bill passes and we digest it. I am angry that congress once again waits until the last minute when it is too late for us to help our clients (their constituents). End of rant. Does anyone think we should nonetheless advise all clients to just pay their property and ES taxes in December, on the assumption it can't hurt and might help?

The IRS website has a "where's my amended return refund" link on their website (if you can find it--I cannot get used to the new interface).

You can request a first-time penalty abatement if your client has a clean record of timely tax payments for the past three years. This is an administrative waiver and is granted automatically if you ask--no excuses needed. I'd respond to just one notice. Don't want to confuse the IRS; they're obviously already confused.

Scholarships that aren't limited to tuition, fees, books, or given to a student who is not a degree candidate, are taxable. So if an art lover is taking an art history course just to expand their knowledge, and they get a scholarship from an art museum, it's taxable. If a scholarship covers room and board, that part is taxable. I'm sure you've done so, but check out Pub 970 for further confusion.

Share your frustrations with the IRS liaison for your area. While they do not handle individual cases, they are interested in systemic problems and will bring them to the right people's attention. If you have several clients with refunds who are getting no attention vs. the ones who owe, tell your liaison about the missed deadlines, inaction, etc. One year all of my clients who had a deceased person on their returns got rejected because the SS# was locked by SSA. My liaison got it fixed in no time.

Be careful about guessing at land/improvement ratios. In the line-by-line audit our client is undergoing (yes, still ongoing--auditor opened up another year and thought up new questions), auditor wants verification of those numbers. She actually looked up the assessor data online and found that the sq footage of the house is different than what we've used for over a decade. We just used what the client told us back then (didn't have access to online data in those days). The difference is a small percent, times the home office expenses will change the tax bill by under $50. I think we could argue this is de minimus in a regular audit but in the National Research Program audits every single thing has to be proved. It seems we used the 80/20 rule for land value, again not having easy online access back then, and that is also being questioned because the assessor card shows the land and house are more like 50/50. Maybe someone can help with this one: The client takes people on fishing trips--a legitimate business, licensed, separate checking account, pretty good logs and records. Auditor wants to know how much of boating time is "personal use," to correctly apportion expenses. That's a legitimate question with a car and can be calculated. But boats don't have odometers or have time books like truckers unless they're really big boats I guess. I'd like to argue that there is zero personal use but not sure that will fly (it won't with autos). So how do we give the auditor something mathematical to determine business vs personal use?

We use Ultratax for tax prep, and it too does not calculate interest and penalties with any accuracy. I just explain to the clients that IRS interest rates change every month so I can't do the math; plus we don't know what day the IRS will receive their check.... just wait for them to send you a bill. I also write on the instruction sheet that tells them how much to send and where that "IRS will bill for interest and penalties--just pay it." Still get the phone calls though....

You should treat this as gifted property. Regardless of what the land records say, your client didn't pay any money. The following is the from Q&As on irs.gov but it's also stated in the regs and pubs: "Question What is the basis of property received as a gift? Answer To figure out the basis of property you receive as a gift, you must know three amounts: The adjusted cost basis to the donor just before the donor made the gift to you. The fair market value (FMV) at the time the donor made the gift. The amount of any gift tax paid on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property. Your basis for figuring a gain is the same as the donor's adjusted basis, plus or minus any required adjustments to basis while you held the property. Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property. Note: If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property." You need the FMV at the time of the gift. And to file a belated gift tax return. And just for the fun of it, to investigate how FIL sold property he did not own. Or you can take the substance over form route. Property still belonged to FIL, he has sold it and is now gifting the proceeds to his daughters but keeping the loss for himself.

Not all countries have simple tax systems, with one exception being those that have VATs. Remember when the big accounting firms were offshoring tax prep to India? That's because India's tax code is similar to ours. I find it more complex. There are different sets of rules for rental properties and cap gains--you can pay one rate or none at all if you invest in India bonds, a higher one if you take the money and run. There are two types of bank accounts--one that pays a really high rate but the money can't be converted from rupees ever, and another that pays much less but can be taken out of the country. My Indian client thankfully has his India taxes done by an accountant there and brings me the result. But the credentialing system is different; his India CPA advised him to do a like-kind exchange with US property but my research showed that's not allowed. I think the India offshoring diminished when congress passed a law saying clients had to sign on to allowing their info to be sent abroad. Who would agree to that?

Thanks for the link, easytax. With today's extra hour of sleep, I had the energy to read through it. Like Jack, I try to avoid reading proposed changes, but this one has garnered so much attention I thought it necessary. I won't go into the changes the media has covered so often, but I found many surprises. Charitable miles will finally be adjusted for inflation. Gone are credits for adoption, elderly and disabled, electric cars. Moving expenses won't be deductible, and employer reimbursed moving expenses will be taxable. The proposal says students can no longer claim the Hope Scholarship Credit. The IRS pub says that credit isn't available in 2016, so the policymakers apparently never read current law. Lifetime Learning Credit is repealed. Students can take the AOC for a fifth year at half the rate ($500 refundable). Employer-provided education assistance is taxable, as is savings bond interest even if used for higher ed. No more Coverdells. 529s can cover $10k elementary and secondary school tuition. No more deductions for casualty losses. Proposal makes an exception for "hurricanes" but later says federal disaster areas. Itemized deductions will no longer be limited. Charitable deductions allowed up to 60% AGI. Proposal seems to get rid of professional gambler Sch C losses. Their losses + expenses will be limited to winnings. Refinanced mortgages will use date of original mortgage, so will be grandfathered if original mortgage was. Exclusion of gain on principal residence: Must own and use for 5 of 8 years; can only use once every 5 years. Exclusion phases out dollar for dollar for AGIs above $250k single and $500k MFJ. Like-kind exchanges limited to real property. No more IRA recharacterizations. Businesses can't deduct entertainment expenses or transportation and gym fringe benefits. Private activity bonds, including for stadiums, not tax exempt. Repeal of technical termination of partnerships when 50% interest sold or exchanged.

The stated points of tax reform were to (1) cut corporate tax rates (as if big corps pay anything now) and (2) to simplify the tax code. The latest proposal is anything but simplification. Up to $10k of property taxes will be allowed; interest on mortgages up to $500k, no second homes; child tax and adult dependent CREDITS instead of deductions from AGI. Instead of erasing 1000 pages of tax code they seem to have added 10,000. Elimination of the AMT is anything but. The original proposal seemed to eliminate the regular tax system and imposed AMT on everyone--no dependent exemptions, no state/local deduction, no misc itemized deductions, limited mortgage interest deduction. Face it, AMT is a much simpler tax system than what we have now (and for that matter, what is in the revised proposal). Typically those with really high AGI don't pay AMT because their regular tax rate is higher than 28%. Those with big real estate investments will get a break because they won't have the longer AMT depreciation periods. I don't see the student loan interest adjustment helping many people now, so have no opinion on its elimination. The adjustment starts to phase out at $65k single and $130k MFJ and is gone at $80k/$160k. These are the people who get loans! Lower AGI gets grants; higher can presumably afford to pay tuition. The one part of the proposal I am enthusiastic about is the elimination of HOH filing status. It's confusing and often misused.

Catherine, good for you for being skeptical. Since the IRS seldom puts links in emails, I also distrust. I usually go to irs.gov and log in there and get done what I need to do. Lately, though, the website is strange. Sometimes it shows the places I might want to go, sometimes not. The new interface does not have a link for "tax pros" like it used to, at least none that I can find. Last time I needed eservices i googled it. Anyone else experiencing this problem? I use Firefox.

Students who are dependents do not qualify for the refundable portion of the AOC. Since Naveen's client has no taxable income, no dice even if parents filed a US return. I do have some clients who make way too much for the credit but their students have taxable income. I try the return both ways, with and w/o the dependent, to see if it will help the family tax situation. Rarely but sometimes what they lose in the dependency exemption is more than made up by the student getting the credit.

How about the income tax pot of gold from gambling proceeds? Casinos etc don't report on W2G unless the win is over some fairly high amount--varies depending on the game, pot, amount bet--I never could figure it out. Someone who wins $500 or even $1000 several times a year won't get a form and likely won't report anything. Of course, most lose more than they ever win so it would be a wash for federal tax for those who itemize. But many states don't allow itemized deductions so will tax gross winnings, most of which apparently don't get reported to them. I think those high W2G limits were part of a deal the states worked out with casinos because they get a share of the house wins. In this case, the taxpayer (or nonpayer) wins too. The 1099ks are likewise set at pretty high limits. Someone who sold one item for $15k would never get one. Don't know who worked out that arrangement, but I suspect that some lobbyists made out like bandits.

In 2002, colleges were supposed to report amount paid for qualified education expenses. They whined that their computer systems weren't up to it so were given the option of reporting amount billed. Every time the deadline has come to eliminate the amt billed box, they whined some more that they still weren't ready. It takes supposedly the brightest among us who inhabit our institutions of higher learning FIFTEEN years to figure it out, and they had 15 years warning. Guess they knew this was an easy pass and didn't bother, or else they really don't belong in a place that teaches our young. I understand that colleges use academic years, bill for calendar year semesters, and receive parent/student/financial aid payments at different times. Sounds like an easy coding solution to me. So we beleaguered tax pros will have to spent yet another year combing through unintelligible bursar statements while the brilliant IT staffs spend their time inventing with more ways to use the student ID cards for off-campus pizza and stadium seating lotteries.

We stopped taking new EIC clients when the due diligence rules were tightened and the fines went way up--too much risk. We only do a handful now, all from long-time clients we know, but we did raise their fees $25. Like John H, we send others to HRB and tell them their preparers have more training in this area, which is true. But how can you turn away clients with rentals or security transactions? Between those items and small businesses, that's the majority of our client base. While the forms for clients who purchased insurance through the exchanges are a pain, we don't discourage those clients. You have to tackle the forms anyway for those who had a lapse in coverage or are insuring a nondependent under the age of 26. We are seeing a number of audits for those who "forgot" to bring us their 1095As. If we could turn down anyone, I'd vote for those with education credits. We get a lot of audits, especially if there were 529 distributions. Hopefully this year the 1098Ts really will have the "amount paid" instead of "amount billed." I am so sick of putting returns on hold while parents try to get the financial transcripts from the schools. We'll still have fun determining the nontaxable portion of the 529 distributions, but that's why we charge the big bucks. So John H, if you don't have clients with EIC, rentals, and brokerage statements, who's left? After this busy summer, I don't want anymore clients who will get audit notices.

IRS signed a new contract with Experian, but Equifax is taking them to court over the stop work order. Talk about nerve.