America's Tax Experts; The Enrolled Agent

An Enrolled Agent (EA) is a federally-authorized tax preparer who has technical taxation expertise and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for IRS audit help, collections, and appeals.

What does the term "Enrolled Agent" mean?

"Enrolled" means to be licensed to practice by the federal government, and "Agent" means authorized to appear in the place of the taxpayer at the IRS. Only enrolled agents, attorneys, and CPAs may represent taxpayers before the IRS but Alliance Financial & Income Tax represents tax payers with enrolled agent certification. The profession of an enrolled agent began around 1884 after questionable claims had been presented for Civil War losses. Back then, Congress acted to regulate the profession that represented citizens in their dealings with the U.S. Treasury Department.

How do you become an enrolled agent?

 The enrolled agent license is earned in one of two ways, by passing a comprehensive examination which covers all aspects of the tax code to receive an enrolled agent certificate, or having worked at the IRS for five years in a position which regularly interpreted and applied the tax code and its regulations. All candidates must pass a rigorous background check conducted by the IRS.

How can an Enrolled Agent help me?

Enrolled agents advise, represent, and prepare tax returns for individuals, partnerships, corporations, estates, trusts, and any entities with tax-reporting requirements. An enrolled tax agent maintains expertise in the continually changing field of taxation, enabling them to effectively represent taxpayers audited by the IRS.

Privilege and the Enrolled Agent

The IRS Restructuring and Reform Act of 1998 allow federally authorized tax preparers, defined as those bound by the Department of Treasury’s Circular 230 regulations, a limited client privilege. This means that confidentiality is required between the taxpayer and the enrolled agent under certain conditions. The privilege applies to situations in which the taxpayer is being represented in cases involving audits and collection matters. It is not applicable to the preparation and filing of a tax return. This privilege does not apply to state taxes, although a number of states have an accountant-client privilege.

Are Enrolled Agents required to take

continuing professional education?

In addition to the stringent testing and application process, the IRS requires enrolled agents to complete 72 hours of continuing professional education, reported every three years, to maintain their enrolled agent designation. NAEA members are obligated to complete 90 hours per three year reporting period. Because of the knowledge necessary to become a tax enrolled agent and the requirements to maintain the license, there are only about 46,000 practicing enrolled agents.

What are the differences between Enrolled Agents

and other tax professionals?

Only enrolled agents are required to demonstrate to the IRS competence in matters of taxation before they may represent a taxpayer before the IRS. Unlike attorneys and CPAs, who may or may not choose to specialize in taxes, all enrolled agents specialize in taxation. Enrolled agents are the only taxpayer representatives who receive their right to practice from the U.S. government (CPAs and attorneys are licensed by the states).

Are Enrolled Agents bound by any ethical standards?

Enrolled agents are required to abide by the provisions of the Department of Treasury’s Circular 230, which provides the regulations governing the practice of enrolled agents before the IRS. NAEA members are also bound by a Code of Ethics and Rules of Professional Conduct of the Association.

Why should I choose an Enrolled Agent who is a member of the

National Association of Enrolled Agents (NAEA)?

The principal concern of the National Association of Enrolled Agents and its members is honest, intelligent and ethical representation of the financial position of taxpayers before the governmental agencies. Members of the enrolled agent association must fulfill continuing professional education requirements for tax planning that exceed the IRS’ required minimum. In addition, NAEA members adhere to a stringent Code of Ethics and Rules of Professional Conduct of the Association, as well as the Treasury Department’s Circular 230 regulations. NAEA members belong to a strong network of experienced, well-trained tax professionals who effectively represent their clients and work to make the tax code fair and reasonably enforced.

What the New Tax Bill Means for You

As we have said for years, on January 1^st we will
become historians regarding the tax and financial decisions you made in
2018.  Look at this article to learn more
about tax law changes that may affect your situation.  We still have time to adjust if necessary.  Have questions?  Call us at 816-220-2001  What the New Tax Bill Means for You: What does the Tax Reform and Jobs Act mean for you?

How Is the Gift Tax Calculated?

Technically, the federal gift tax applies to most gifts you make during your lifetime—from that $5 bill you might give a homeless person on the street to a substantial down payment on a house for your child. You're supposed to keep track of all of it. Does that sound intimidating? Take a deep breath and relax. It's not as bad as it sounds. 

The following is a break down of the Gift Tax rules provided by your Blue Springs income tax preparation office of Alliance Financial & Income Tax.

You Have Two Options 

Every taxpayer has two options for dodging the gift tax. The first is an annual exclusion, and you're also allowed a lifetime exemption.

You'd have to give away a considerable amount of money or property before you'd owe this tax. Gifts are only taxed when their value exceeds the lifetime exemption—the amount you're permitted to give away during the course of your entire life, which is $11.18 million as of 2018. 

What Counts As a Gift?

The Internal Revenue Service considers a gift to be virtually any transfer of cash or property in which the donor doesn't receive something of equal value in return. If you give someone cash with the understanding that he does not have to pay you back, that's a gift. If you sell someone a $300,000 home for $150,000, you've made her a gift of $150,000. 

This is all based on the IRS definition of "fair market value." Cash is what it is, so there's rarely any doubt there. As for that house, the IRS says its fair market value is what someone could be expected to pay for it if neither the buyer nor the seller were under any sort of duress to commit to the transaction.

The IRS definition of a gift can even hide in places you might not expect. If you make a loan to a friend without charging him interest, the IRS says that's a gift—particularly if you later forgive the debt. And if you put your adult child on your bank account as a joint owner, perhaps so she can help you take care of your financial business, guess what? She's just given you a taxable gift.

Another important consideration is that not all gifts are taxable. Dad could pay his son's tuition bills or medical expenses in any amount without incurring a gift tax, provided he gives the money directly to the learning institution or the medical facility, not to his son.

Note: Gifts to spouses who are U.S. citizens are tax-free as well.

The Annual Gift Tax Exclusion

It all starts with the annual exclusion, which lets you make gifts of up to $15,000 per year per person tax-free as of 2018. These gifts don't count against your $11.18 million lifetime exemption.

Note: The lifetime exemption only kicks in when you exceed this annual amount in a given year. 

The key words here are "per person." If your son and his spouse want to buy a house and you want to give them $30,000 for a down payment, you can do that without paying a gift tax. You can attribute $15,000 for that year to each of them. The IRS doesn't care whether they both spend the money on the same thing. 

And here's another bonus if you're married. You and your spouse are each entitled to a $15,000 annual exclusion. Technically, you could give your son and his spouse $60,000 toward that house—$15,000 to each of them from both you and your spouse.

When and Why You Must File a Gift Tax Return

You must report gifts over the annual exclusion to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This records how much you've gone over the annual exemption each year—the amounts that count against your lifetime exemption.

Of course, you can go ahead and pay the tax on these gifts when you file the gift tax return. You don't have to let them count against your lifetime exemption. 

The Lifetime Exemption Is a "Unified" Credit 

The Internal Revenue Service lumps together all gifts you make during your lifetime with gifts you make as bequests from your estate when you die. The gift tax and the estate tax share this same $11.18 million exemption under the umbrella of something called a unified tax credit.

Eventually, at the end of your life when your estate settles, all these annual overages are added up and applied to your lifetime exemption. If your excess gifts plus the value of your estate exceed the lifetime exemption of $11.18 million, the tax rate tops out at a whopping 40 percent for estates as of 2018. 

If you exceed your annual exclusions to the tune of $1 million during your lifetime, you'll have $10.18 million left to shelter your estate from estate taxes when you die.

Note: The value of your lifetime gifts comes off the lifetime exemption first; then any exemption that is left over is applied to your estate's value.

Of course, $11.18 million is a lot of money. Only two out of every 1,000 estates owed any estate tax in 2017—and the annual exemption that year was roughly half the 2018 exemption, just $5.49 million. 

A Gift Tax Example

If a father makes a gift of $115,000 to his son for the purchase of a home, $15,000 of that gift is free and clear of the federal gift tax, thanks to the annual exclusion. The remaining $100,000 is a taxable gift and would be applied to his lifetime exemption if he chose not to pay the tax in the year he made the gift. 

But if the father gifts his son $15,000 on Dec. 31, and then gives him an additional $100,000 on Jan. 1, the December gift is free and clear and only $85,000 of the subsequent $100,000 counts against his lifetime exclusion—$100,000 less that year's annual $15,000 exclusion. Remember, the annual gift exemption is per person per year. 

You can give the annual exclusion amount to any one person every single year and never dip into your lifetime exemption. If the father doesn't want to pay the gift tax on the $85,000 in the year the gift is made, he can reduce his lifetime gift tax exemption by this amount. Despite his significant generosity, Dad would still have $11,095,000 of the unified tax credit left to shelter his estate. 

Another Option for Payment 

The IRS isn't entirely without a heart, and it encourages generosity to some extent, giving you yet a third option. If you give gifts in excess of the annual exclusion, a special rule lets you spread their value out over five years, another way of effectively paying the tax now so that you don't have to dip into your lifetime exemption. 

Let's go back to that $115,000 Dad gave his son. The first $15,000 is tax-free, thanks to the annual exclusion. The second $15,000 is tax-free, thanks to the following year's annual exclusion. Now Dad can shave an additional $60,000 off his taxable gift, stretching that extra $100,000 over a total of five years: $15,000 for the Jan. 1 gift and $15,000 in each of the next four years.

He's whittled his taxable gift down to just $25,000, on which he can either go ahead and pay the gift tax or let it count against his lifetime exemption. 

Of course, this means he can't give his son any more tax-free gifts, at least for five years. And he must still file a gift tax return in this case to let the IRS know that he's electing this option. 

Exemptions Increase Periodically 

The lifetime exemption increases periodically to keep pace with inflation and due to changes in legislation. The 2017 lifetime exemption of $5.49 million increased from $5.45 million in 2016 with inflation adjustments, then it went from $5.49 million to $11.18 million in 2018, thanks to the Tax Cuts and Jobs Act and another inflation adjustment. 

The annual exclusion was stuck at $14,000 from 2013 through 2017 before it increased to $15,000 in 2018. It can only change in $1,000 increments, and it does not have to do so every year. 

Note: The bottom line is that the great majority of us can give to our heart's content with no tax issues to worry about. 

Breaking Down the New Mortgage Deduction Rules

Home buying and home building are good for the economy. That fact, and not lawmakers’ desire to give working families a break, is what makes the mortgage interest deduction a sacred cow. The government sees the deduction as something of a reverse stimulus. By encouraging people to buy houses, and therefore encourage builders to construct houses, the economy prospers.

Not all nations see it that way. Some industrialized countries, most recently Japan, have either tinkered with the MID or done away with it entirely. Many Tax Cuts and Jobs Act provisions expire in 2025. We’ll see what happens then. But for now, the MID is not going anywhere, at least for the most part.

TCJA Mortgage Deduction Rules

Taxpayers may still deduct the interest payments they make on loans secured by their primary residences. The price ceiling dropped a little, from $1 million to $750,000 in most cases.

The more significant change is the Home Equity Line of Credit deduction. Previously, the IRS treated HELOC interest on a subsequent mortgage just like interest on a first mortgage. That was one driving factor behind the HELOC boom/housing bubble in the mid to late 1990s, and we all remember how that ended up. The government, which still has a bad taste in its mouth after the Financial Crisis, ended that deduction.

But not so fast. HELOC interest may still be deductible if the HELOC is a qualified residence loan. If the borrower re-invests the loan proceeds into the house, the MID still applies. But if the homeowner uses the loan for any other purposes, the interest is not tax-deductible. More on that below.

It’s a bit unclear, but it seems that 100 percent of the proceeds must go to home improvement. If the owners borrow $100,000, use $99,999 to improve the house, and spend $1 on a candy bar, that might cut off the deduction.

To a great many people, all this information may be irrelevant. In recent tax years, about a third of taxpayers have itemized their deductions. But TCJA doubled the standard deduction. That’s great news for people who take a standard deduction, but not so great for everyone else. Many predict that the number of itemized returns may plummet to around 5 percent beginning with the 2018 tax year. The standard deduction will be so high that itemizing, including the MID, simply does not make sense.

When is “Mortgage Interest” Really “Mortgage Interest?”

The tracing rules have always been rather complex. These are the guidelines that separate the sheep from the goats in terms of the MID. Basically, the following types of interest are deductible:

• First mortgage on a primary residence,
• Subsequent mortgage on a primary residence (assuming the HELOC is a QRL),
• Material participation business interest, and
• Investment interest.

Some examples might be helpful.

Assume you take out a $100,000 unsecured loan and use the money in your freelance consulting business. The interest is tax-deductible because you materially participate in that business.

Assume you are a silent partner in a consulting business and you borrow $100,000. Your house does not secure the loan and all the money goes into the consulting business. The interest is generally not tax-deductible because you do not materially participate in that business. Exception: The interest is tax-deductible if passive activity income exceeds passive activity expenses.

Tracing rules are even more complex if you combine different loans for different purposes. The best practice is to keep all loans and loan funds separate.

The mortgage interest deduction is still around, but the rules have changed. Reach out to us today to learn more about the new tax law changes which take effect in January 2019.

Value vs. Growth Investing

Value vs. Growth Investing: Among stock-market investors there’s long been a debate between those who favor value and those who favor growth.

Eight Tax Breaks for Parents

If you have children, you may be able to reduce your tax bill using these tax credits and deductions.

1. Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. Qualifying dependents must have a valid Social Security Number. This credit is refundable, which means you may a refund even if you don’t owe any tax.
2. Credit for Other Dependents: This is a new tax credit under tax reform and is available for dependents for whom taxpayers cannot claim the Child Tax Credit. These dependents may include dependent children who are age 17 or older at the end of 2018 or parents or other qualifying relatives supported by the taxpayer. This credit is nonrefundable.
3. Child and Dependent Care Credit: You may be able to claim this credit if you pay someone to care for your child under age 13 while you work or look for work. To claim this credit you will need to accurately track your child care expenses.
4. Earned Income Tax Credit: The EITC is a benefit for certain people who work and have earned income from wages, self-employment, or farming. EITC reduces the amount of tax you owe and may also give you a refund.
5. Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt a child.
6. Coverdell Education Savings Account: This savings account is used to pay qualified expenses at an eligible educational institution, which starting in 2018, includes primary and secondary schools as well as colleges and vocational schools. Contributions are not deductible; however, qualified distributions generally are tax-free.
7. Higher Education Tax Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credits are education tax credits that reduce your federal income tax dollar for dollar, unlike a deduction, which reduces your taxable income.
8. Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income, so you do not need to itemize your deductions.

As you can see, having children can impact your tax situation in multiple ways. Make sure that you're taking advantage of credits and deductions you're entitled to by speaking to a Blue Springs tax professional today.

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Women and Financial Strategies: Most women don’t shy away from the day-to-day financial decisions, but some may be leaving their future to chance.