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Do Androids Dream of Electric Audits?

David Robson - Friday, January 18, 2019

In 1982, the movie Blade Runner presented a technologically advanced vision of the year 2019. There were flying cop cars. (What grim dystopian movie doesn't feature flying cars?) There was commercial space travel. There were bioengineered androids, known as "replicants," that drove the story. The film even predicted voice-controlled video phones to communicate with our offices!
Today's reality isn't quite so exciting. We've got the voice-activated video phones! But we're not using them to summon flying cars or book trips to the Moon. No, we're using them to waste time checking Facebook, Twitter, and Instagram. We pick up our phone every 12 minutes on average, and spend three hours and 35 minutes per day with our heads buried in our screens. Psychiatrists have even identified "internet addiction disorder" as a "condition for further study."
Well, if you can't beat 'em, join 'em. The IRS manages several Twitter feeds for taxpayers and professionals that are worth following. But now they're looking to get even more involved. We're not talking about auditors posting pictures of their dogs (although we'd totally follow that, too). Instead, they want to investigate whether social media can help them collect taxes.
Current IRS rules generally prohibit employees from using any social media at work. They specifically can't create fake accounts to "friend" you and snoop on your finances. But the IRS knows that people post enormous amounts of information online, information they can use to help with collections. So last month, the IRS issued a request for information and product demonstrations from electronic research vendors. They're hoping to find a vendor who can:
• "Provide a product that is easily explainable in court."
• "Provide real time, customizable reports of publicly available social media information (provided or advertised by businesses), such as new products, current sales, and new locations."
• "Provide reports showing that a taxpayer participated in an online chat room, blog, or forum, and reports showing the chat room or blog conversation threads."
• "Provide available biometric data, such as photos, current address, or changes to marital status."
• "Provide access for at least 25,000 concurrent users."
Show of hands here: who wants any part of the government tracking your profile photos, status alerts, or chat room conversations? The good news is that, at least for now, the IRS would use their new super power for good, not evil. "Such a tool would not be used to search the internet or social media sites for purposes of identifying or initiating new tax audits." Of course, that doesn't mean the IRS won't get more aggressive down the road, using predictive analytics and social media as part of a broader effort to target specific taxpayers for extra attention.
The IRS's move towards harnessing social media is part of a broader movement to put "Big Data" to work for various goals. But data isn't always bad. Here at our firm, we're using it to help clients like you pay less tax. So call us when you're ready to join the future. Someday your savings might pay for your own flying car!

2018 Changes due to the Tax Cuts and Jobs Act (TCJA)

David Robson - Thursday, January 17, 2019

On December 22, 2017, the President of the United States signed into law major tax reform in the Tax Cuts and Jobs Act (TCJA). The TCJA made widespread changes to the Internal Revenue Code which will affect your 2018 tax return. Here are some of the more common changes that could affect your tax return.
Changes affecting most taxpayers
Personal exemption rate is reduced to zero. Prior to 2018, a personal exemption amount of over
$4,000 per person could be used to reduce taxable income. This personal exemption amount has been reduced to zero for 2018 through 2025.
Standard deduction increase. The standard deduction for most returns has been almost doubled over the amount that was allowed last year. The deduction for Single and Married Filing Separately returns is $12,000, Head of Household returns is $18,000, and Married Filing Jointly and Qualifying Widow(er) returns is $24,000. The additional amounts for being over 65 or blind will still be allowed. Because of this change, this year many taxpayers will find that claiming the standard deduction instead of itemizing deductions will give them a lower tax.
SSN Required for Child Tax Credit (CTC). An SSN is now required to claim CTC. No credit will be allowed for any qualifying child unless the taxpayer provides that child's SSN or a Work Authorization Permit from Homeland Security. Prior to this year, CTC could be claimed for a child who had an ITIN.
Increase in CTC. The Child Tax Credit has been increased from $1,000 to $2,000 for 2018. The modified adjusted gross income threshold where the credit is phased out is $400,000 for joint filers and $200,000 for all others (up from $230,000 and $115,000, respectively), so many more taxpayers will be able to claim this credit.
The maximum age for a child eligible for the credit remains 16 (at the end of the tax year).
New Credit for Other Dependents (ODC). Beginning in 2018, a new $500 credit is available for dependents who do not qualify for the CTC. Most dependents listed on the tax return who do not qualify for CTC will now qualify for the smaller ODC, including parents who are claimed as dependents.
Changes to itemized deductions
Medical. For taxpayers of all ages, the deduction threshold for medical expenses is 7.5% of AGI.
State and local taxes (SALT). There is a cap on the deduction for state and local taxes paid. The deduction for state and local income taxes, real estate taxes, and personal property taxes combined is limited to $10,000 per return, ($5,000 for Married Filing Separately returns).
Limitation on deduction for home mortgage interest. You may be able to deduct mortgage interest only on the first $750,000 ($375,000 if married filing separately) of indebtedness. Higher limitations apply if you are deducting mortgage interest from indebtedness incurred on or before December 15, 2017.
No deduction for home equity loan interest. No matter when the indebtedness was incurred, you can no longer deduct the interest paid on a home equity loan unless loan proceeds were used to buy, build, or improve your home.
Limitation on the deduction for casualty and theft losses. You can no longer deduct a personal casualty or theft loss unless the loss occurred in a federally declared disaster area.
Deductions for employee business expenses eliminated. One of the biggest changes under this new law was the elimination of the deduction for unreimbursed employee business expenses beginning with 2018 tax returns. This effectively means that employees will no longer be able to offset their taxable income by common business expenses they incur. (This change under the TCJA does not affect self-employed individuals.)
Form 2106, Employee Business Expenses, is now to be used only for certain categories of employee:
• Qualified performing artists
• Fee-based state or local government officials
• Armed forces reservists
• Employees with impairment-related work expenses
Standard mileage rate. The 2018 standard mileage rate is 54.5 cents per mile for business miles.
Additional changes
Moving expenses. Beginning January 1, 2018, moving expenses cannot be deducted by most people. Active duty members of the U.S. Armed Forces who move pursuant to a military order and incident to a permanent change of station can still deduct moving expenses and exclude reimbursed moving expenses.
Additionally, most taxpayers cannot exclude employer reimbursements for moving expenses from income.
Qualified Business Income Deduction (QBID). A new deduction for qualified business income from a trade or business, including sole proprietorships, S corporations, or partnerships, is available on Form 1040. QBI doesn't include W-2 wages. The deduction is subject to many limitations, such as income level and type of business. If you have QBI, you can reduce your taxable income, whether you itemize deductions or claim the standard deduction. In its simplest form, if adjusted gross income less itemized or standard deduction is under $157,500 ($315,000 for joint filers) you can deduct 20% of your QBI from income before computing your tax.
Alternative Minimum Tax (AMT). Fewer taxpayers will be subject to AMT due to increased exemption amounts and phaseout thresholds.
Certain ITINs expired. As of December 31, 2018, ITINs with middle digits "73," "74," "75," "76," "77," "81,” or "82" in the fourth and fifth positions have expired. The ITIN must be renewed if it will be included on a 2018 federal tax return.
Depreciation changes. There are numerous changes to how depreciation can be claimed on assets purchased during 2018. Many assets can be entirely written off in 2018 rather than being depreciated over several years.
Healthcare Mandate Penalty Repealed for 2019. Beginning in 2019, individuals who fail to carry health insurance will no longer be required to pay an individual shared responsibility payment with their tax return.

Never Lose Sight of Survival

David Robson - Monday, January 14, 2019

Movie fans, quick: what do you get when you combine Night of the Living Dead, Deliverance, and The Mist — with just a hint of Sophie's Choice? It probably looks a lot like like Netflix's newest hit, Bird Box. The movie imagines a shattered future where an unknown presence has driven everyone who sees it to suicide, and follows Sandra Bullock and two five-year-old children on a desperate blindfolded gauntlet down a raging river in search of safe haven.
Netflix dropped Bird Box on December 21 — a time when they shrewdly calculated most Americans would be fed up with Elf and Christmas cheer, and grateful for the sweet release of post-apocalyptic chaos. Critics generally said "meh." But that didn't stop the "disappointingly clunky waste of a star-studded cast" from attracting record views. The show has also spawned memes like the #BirdBoxChallenge, where people who wouldn't survive five minutes in a real apocalypse bid for internet fame by posting videos of themselves pulling stupid stunts while blindfolded.
Now, we may be biased here, but we assume that at least of few of those millions of viewers wondered what would happen to income taxes after civilization collapses. (We sure did.) And we know you'll be pleased to discover that our friends at the IRS have planned for that sort of disaster and more!
The first level of IRS emergency preparedness deals with garden-variety disasters like hurricanes and earthquakes. These focus on helping taxpayers manage their obligations until things return to normal. They include predictable tips like taking advantage of paperless recordkeeping for tax files, documenting valuables and equipment, checking fiduciary bonds (to protect yourself if your payroll processor goes bust), and updating emergency plans. They also include policies extending due dates to give taxpayers living in disaster zones time to recover.
But the real action for IRS preppers involves "continuity planning" for existential threats like biological warfare, nuclear winter, or alien invasion. (Aliens from space, not across the border.) Official IRS documents outline several proposals, dating back to the earliest days of the Cold War, to help re-start collections. These include government economists holed up in the usual "undisclosed locations" dispensing cash to restart the economy, deciding when to forget about trying to collect pre-disaster taxes, and probably ditching income taxes altogether in favor of a 20-30% sales tax.
As for our friends at Netflix, word on the street has it that Bird Box producers are readying a sequel called Cat Box, where survivors escape death, not by covering their eyes, but by plugging their noses. (Trust us, you don't want to take on that monster.) And they've created even more buzz now with Bandersnatch, an interactive episode of their Black Mirror series where the bottom border of the screen periodically pops up to let you make choices for the characters and "write your own ending."
But we can't see why Bandersnatch is such a big deal, simply because we've been doing that for years. Just like television dramas follow a basic structure built around plot, characters, and similar elements, so does a life fueled by money. Lots of people want access to your money pool, and for most Americans, the biggest slice goes to government. But no one else is using tax planning to script your financial life, with lower taxes as your central character. That's why you need to call us now, to avoid tax apocalypse with your eyes wide open!

Tiny Violins for Very Large Men

David Robson - Friday, January 04, 2019

2019 is here, and it's almost time to file your first tax return under the new law. But you probably sat around watching sports all weekend instead of talking taxes, didn't you. (Did Santa bring a new TV?) So, as we ring in the New Year, let's take a look at how the new tax bill affects some of those athletes you've been watching.
Washington sold the Tax Cuts and Jobs Act as "tax simplification." And really, who can't raise a toast to that? Lower rates! Higher standard deductions! A 1040 you can fill out on a postcard! But many taxpayers, especially those in high-tax states like New York and California, can be forgiven if they feel like they woke up with a massive hangover. Deductions for state and local income and property taxes are now capped at $10,000, regardless of income. And employee business deductions are nixed entirely. That's going to be pricey for the Very Large Men we mentioned in the title.
Take 6'8" NBA superstar Lebron James. He's played in Cleveland, where state and local taxes total 7.5%. He's played in tax-free Miami. And now he's playing in Los Angeles, where he pays 13.3%. (13.3% going to California sure sounds like a technical foul.) Under the old rules, he could deduct whatever he actually paid. Now the refs limit him to the same $10,000 as the rookies earning the league minimum. Granted, that minimum is $838,464. But doesn't it make sense to let a guy paying tax on 43 times that amount actually deduct 43 times as much?
Income taxes won't be the only expense to bite King James under the new rules. He owns a $9 million house in his hometown of Akron (where $9 million buys a lot of house), a $21 million house in Brentwood (where $21 million still buys a pretty nice crib), and a $23 million house in Brentwood. (Not a typo.) Property taxes on those homes reach well into six figures, if not seven. But now he'll watch those deductions bounce off the rim and rebound into IRS hands.
Even athletes who play in states with no income tax used to be able to deduct non-employee business expenses: agents' and managers' fees, health club and training expenses, travel expenses, and players' union dues. But now those are gone, too. Agents typically take 10% of a client athlete's salary and endorsement income, which means losing that deduction alone can eliminate the benefit of lower overall rates.
The new law does give LeBron one potentially important break. Charitable deductions used to be capped at 50% of adjusted gross income. The new law raises that limit to 60%. LeBron is famously charitable, especially for educational causes, and may appreciate that change someday.
As for that postcard-sized tax return? Well, yes, the IRS has released a new Form 104. Aad yes, you can print it on a postcard. But don't get too excited. They've just stripped out half of the information from the old 1040 and dumped it into six pages of Schedules. Have capital gains to report, or student loan interest to deduct? You'll have to file Schedule 1. Owe AMT? Schedule 2 is just four lines . . . but there goes your postcard. Need to pay self-employment tax? Welcome to Schedule 4. And who wants to report their income where to mailman can see it on its way to the IRS, anyway?
This New Year, millions of Americans will pick cliched resolutions like eating less, exercising more, crying less, or smoking more. (Possibly a typo.) We'd like to suggest something a little more profitable: minimizing the bite that taxes take out of your year. Call us to save, and make 2019 your best year ever!