5 "Myths" about new tax act

(Column by Russ Wiles, Arizona Republic 6/2/18)

Most Americans are finished with income taxes for the year, having completed and filed their returns under the old rules.

But now, a bunch of new rules have taken effect, thanks to the reform legislation enacted late last year. Affected taxpayers would be wise to brush up on the details, as several key provisions already have become sources of potential confusion.

According to one survey released in April, 13 percent of consumers hadn't even heard of tax reform, and others were confused about the impact of key provisions — all of which make it harder to plan ahead.

Here are some of the myths and misconceptions of tax reform to which experts are pointing:

1. Myth: Tax reform will make filing returns a lot easier

Simplification was a major goal of tax reformers, and the new rules will make things easier for some filers. In particular, an estimated one in five taxpayers will switch from itemizing to taking the standard deduction. These people no longer will need to hang onto charitable-donation receipts and other paperwork.

However, not everyone will find tax-return filing to be any simpler, especially those who continue to itemize.

"Overall, the legislation was not simplifying," said Mark Luscombe, a tax analyst with Wolters Kluwer Tax & Accounting. "The only thing you can point to is the increased standard deduction."

In addition, there are some new provisions that taxpayers will need to learn about. Among them is a new 20-percent deduction, a tax-shaving break for people who own "pass-through businesses."

This provision "will require complex calculations that have never existed in the past," said LBMC, a Tennessee company that provides accounting and other services.

There's also a lingering lack of clarity regarding which business owners can take advantage of this deduction and other details, Luscombe said.

In addition, the reform law didn't simplify other potentially complex areas, such as sorting through capital gains/losses or assessing eligibility to make deductible contributions to Individual Retirement Accounts.

2. Misconception: Mortgage interest no longer is widely deductible.

Actually, mortgage interest will remain deductible for the majority of homeowners.

The new law did change the rules so that mortgage interest now only can be deducted on up to $750,000 in debt (on your primary home and one additional dwelling).

But that's still enough to cover loans on most U.S. homes, where the median price is near $246,000, according to the National Association of Realtors ($261,000 in metro Phoenix).

Besides, many buyers make substantial down payments of 20 percent or more, thus taking out smaller loans.

At any rate, this restriction applies only to newer loans taken out after Dec. 14, 2017, noted Tim Steffen, director of advanced financial planning for Baird Private Wealth Management.

"Any loans in place prior to then are still subject to the (previous) $1-million debt limit," he said. "So if the interest on a loan was deductible in 2017, it will likely still be deductible in 2018."

3. Myth: Borrowers no longer can deduct interest on home equity loans

For many people with home-equity loans, the interest deduction was eliminated. But some borrowers still will be able to make use of this tax break. It really boils down to how loan proceeds are used.

As long as the borrowed amount is used to buy, build or substantially improve a home, the interest remains deductible, said Steffen.

But if the proceeds are used to buy a vehicle, pay off other debts (such as credit-card balances) or for other, non-housing purposes, then the interest is no longer deductible.

"This means that borrowers will need to carefully track the use of their home-equity loan proceeds in order to maintain the tax deduction," he said.

4. Myth: Reform means parents no longer will receive tax breaks for their kids.

The personal exemption was repealed, which means there's no longer a $4,050 deduction for a spouse and each dependent, noted Steffen. However, the newly expanded child tax credit will help to offset that.

The tax credit for children under age 17 has doubled to $2,000, plus there's a new $500 credit for other dependents. "So older kids or even your parents who are dependents can qualify for a new credit," Steffen said.

Also, the income levels for eligibility have risen dramatically, meaning many additional families will benefit. For many households, "The new credits will more than offset the loss of the deduction," Steffen said.

5. Misconception: Federal tax reform doesn't affect state income taxes.

Not quite. Most states including Arizona base their own income-tax systems on the federal tax code almost entirely or use it as a starting point. So the drastic changes at the federal level could affect some of these states and the taxes their residents pay.

Reform will broaden the federal tax base, subjecting more personal income to taxation, by eliminating various deductions and exemptions. Congress largely offset this by cutting federal tax rates.

But so far, most states haven't yet cut their own rates or made other adjustments. Unless they do, "Most states will experience a revenue increase" and residents of those states will pay more, the Tax Foundation predicted.

"The vast majority of filers will receive a tax cut at the federal level, but they could easily see a state-tax increase unless states act to prevent one," the group said.

In particular, federal tax reform eliminated the personal exemption but increased the standard deduction. Yet "eliminating the personal exemption broadens the tax base considerably more than raising the standard deduction narrows it," subjecting more income to taxes, the Tax Foundation said.

Thus, it will be important for people to monitor what actions, if any, their state legislatures take.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

If you have questions regarding your specific situation, please contact our Blue Springs tax office at 816-220-2001

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
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Tips to keep in mind on income taxes and selling a home

Taxpayers who sell a home may qualify to exclude from their income all or part of any gain from the sale. Below are some things taxpayers should keep in mind when selling a home:
Ownership and use. To claim the exclusion, the homeowner must meet the ownership and use tests. During a five-year period ending on the date of the sale, the homeowner must have:

• Owned the home for at least two years.
• Lived in the home as their main home for at least two years.

Gain. Taxpayers who sell their main home and have a gain from the sale may usually be able to exclude up to $250,000 from their income or $500,000 on a joint return. Homeowners who can exclude all of the gain do not need to report the sale on their tax return.
Loss. Taxpayers experience a loss when their main home sells for less than what they paid for it. This loss is not deductible.
Reported sale. Taxpayers who cannot exclude the gain from their income must report the sale of their home on a tax return. Taxpayers who choose not to claim the exclusion must report the gain on a tax return. Taxpayers who receive a Form 1099-S, Proceeds from Real Estate Transactions, as part of the real estate transaction must also report the sale on their tax return.
Mortgage debt. Some taxpayers must report forgiven or canceled debt as income on their tax return. This generally includes people who went through a mortgage workout, foreclosure, or other process in which a lender forgave or canceled mortgage debt on their home. Taxpayers who had a written agreement for the forgiveness of the debt in place before January 1, 2017, might be able to exclude the forgiven amount from income.
Possible exceptions. There are exceptions to these rules for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others.
Worksheets. Worksheets included in Publication 523, Selling Your Home, can help taxpayers figure the:

• Adjusted basis of the home sold.
• Gain or loss on the sale.
• Excluded gain on the sale.

Multiple homes. Taxpayers who own more than one home can only exclude the gain on the sale of their main home. They must pay taxes on the gain from selling any other home.
Tax credit. Taxpayers who claimed the first-time homebuyer credit to purchase their home have special rules that apply to the sale. Taxpayers can use the First Time Homebuyer Credit Account Look-up to get account information, such as the total amount of their credit or repayment amount.
More Information:

• Tax Topic 701, Sale of Your Home
• Tax Topic 703, Basis of Assets
• Tax Topic 611, Repayment of the First-Time Homebuyer Credit
• IRS Tax Map, Selling Your Home

Updated Withholding Calculator Reflects Changes in New Tax Law

To help taxpayers, the IRS updated the special Withholding Calculator tool on IRS.gov to reflect changes in the Tax Cuts and Jobs Act passed in December.

With most employees seeing withholding changes in their paychecks, the IRS recommends taxpayers use the Withholding Calculator to do a “paycheck checkup.” This will help taxpayers check that they are having the correct amount of income tax withheld from their paychecks.

Doing a checkup can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time in 2019. Some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks, which would reduce their tax refund next year.

The IRS encourages everyone to check their withholding as soon as possible, but it’s especially important for these people to use the Withholding Calculator to make sure they have the right amount of tax withheld:

• Two-income families
• People with two or more jobs at the same time or who only work for part of the year
• People who claim credits such as the Child Tax Credit
• People who claim older dependents, including children age 17 or over
• People who itemized deductions in 2017
• People with high incomes and more complex tax returns
• People with large tax refunds or large tax bills for 2017

Remember, the Withholding Calculator does not ask the user for personally identifiable information, such as name, social security number, address, or bank account numbers. The IRS does not save or record the information the taxpayer enters in the calculator.

More information:
Withholding Calculator Frequently Asked Questions
Withholding Calculator

IRS Tax Problems

The IRS can piece together a taxpayer’s income and deductible expenses if it suspects the person didn’t correctly report them. That’s what happened in one case when the tax agency performed a “bank deposits reconstruction” of a married couple’s income. The couple questioned the validity of the reconstruction but a federal appeals court ruled that it was properly handled because the taxpayers didn’t keep adequate records or offer any evidence to rebut the IRS’s calculations. 

Alliance Financial & Income Tax, a Blue Springs tax resolution firm, is here to help you resolve your tax problem and put an end to the misery that the IRS can put you through. We pride ourselves on being very efficient, affordable, and extremely discrete. The IRS problems will not just go away by themselves but will keep getting worse with penalties and interest added each day if not addressed quickly.

If you owe the IRS, you have a very serious problem. It may take the IRS several years to catch up to you, but they're relentless and have no mercy in collecting all the money that is owed. When the collection process starts, they'll make your life miserable and literally ruin all aspects of your life. This is where Alliance Financial can help with IRS debt and other problems with taxes.

Do you have any of these questions listed below? If so, call Alliance Financial and Income Tax today so we can help.

IRS Problems

• Have you received an IRS audit notification?
• Haven't filed your tax returns for years?
• Do you owe back taxes?
• Do you have payroll tax problems?
• Has the IRS placed tax liens on your home?
• Is the IRS threatening to seize your bank account and take your money out of the bank.
• Is the IRS threatening to take your paycheck, 401(k), and other retirement accounts?
• Is the IRS threatening to seize your personal property? 
• Has the IRS placed tax liens on your home? 
   
• Is the IRS threatening to seize your bank account and take your money out of the bank. 
   
• Is the IRS threatening to take your paycheck, 401(k), and other retirement accounts? 
   
• Is the IRS threatening to seize your personal property? 

IRS Solutions

• Owe the IRS a lot of money? - Settle for pennies on the dollar!
• Need more time to pay.
• Like to get out from under your tax burden completely.
• Like to get out of a tax debt caused by misdeeds committed by your spouse?
• Like to see what the IRS has on you.

Please contact us if you have any questions or if we may be of any assistance. If you are ready to schedule a time for us to visit you may choose a time online that is convenient for you.  

 

Things to Remember when Considering Early Withdrawals from Retirement Plans

Many taxpayers may need to take out money early from their Individual Retirement Account or retirement plan. Doing so, however, can trigger an additional tax on early withdrawals. They would owe this tax on top of other income tax they may have to pay. Here are a few key points to know:

• Early withdrawals. An early withdrawal is taking a distribution from an IRA or retirement plan before reaching age 59½.
• Additional tax. Taxpayers who took early withdrawals from an IRA or retirement plan must report them when they file their tax return. They may owe income tax on the amount plus an additional 10 percent tax if it was an early withdrawal.
• Nontaxable withdrawals. The additional 10 percent tax doesn’t apply to nontaxable withdrawals, such as contributions that taxpayers paid tax on before they put them into the plan.
• Rollover. A rollover happens when someone takes cash or other assets from one plan and puts it in another plan. They normally have 60 days to complete a rollover to make it tax-free.
• Exceptions. There are many exceptions to the additional 10-percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
• Disaster Relief. Participants in certain disaster areas may have relief from the 10-percent early withdrawal tax on early withdrawals from their retirement accounts.
• File Form 5329. Taxpayers who took early withdrawals last year may have to file Form 5329,  Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, with their federal tax returns. Alliance Financial & Income Tax, a tax and financial services firm in Blue Springs Missouri can help.  

Where is your tax refund?

The IRS has started releasing refunds for taxpayers who claimed the earned income tax credit and the additional child tax credit. Many of the refunds should arrive in bank accounts or on debit cards this week. The IRS also explained some facts about tax refunds, such as: Nine out of 10 are usually issued in less than 21 days, IRS customer service representatives can’t provide refund information until 21 days have passed since a return was filed and requesting a transcript won’t reveal the status of a refund. 

Choosing the Correct Filing Status

It's important to use the right filing status when you file your tax return because the filing status you choose can affect the amount of tax you owe for the year. It may even determine if you must file a tax return. Keep in mind that your marital status on December 31 is your status for the whole year. Sometimes more than one filing status may apply to you. If that happens, choose the one that allows you to pay the least amount of tax.

The easiest and most accurate way to file your tax return is to consult a Grain Valley income tax professional who is able to choose the right filing status based on your circumstances. Here's a list of the five filing statuses:

1. Single. This status normally applies if you aren't married. It applies if you are divorced or legally separated under state law.

2. Married Filing Jointly. If you're married, you and your spouse can file a joint tax return. If your spouse died in 2017, you can often file a joint return for that year.

3. Married Filing Separately. A married couple can choose to file two separate tax returns. This may benefit you if it results in less tax owed than if you file a joint tax return. You may want to prepare your taxes both ways before you choose. You can also use it if you want to be responsible only for your own tax.

4. Head of Household. In most cases, this status applies if you are not married, but there are some special rules. For example, you must have paid more than half the cost of keeping up a home for yourself and a qualifying person. Don't choose this status by mistake. Be sure to check all the rules.

5. Qualifying Widow(er) with Dependent Child. This status may apply to you if your spouse died during 2015 or 2016 and you have a dependent child. Other conditions also apply.

Don't hesitate to call Alliance Financial & Income Tax at 816-220-2001 if you have any questions about filing your tax return this year.