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Tax Tips


ANNUAL TAX UPDATE

I. INDIVIDUAL TAXATION
  • 2016 Marginal Tax Brackets – For 2016 and subsequent years, the individual income tax rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. As in the past, each taxable income tax bracket is increased slightly each year based upon an inflation factor. The 25% bracket runs from $75,301 to $151,900 of taxable income for joint filers and $37,651 to $91,150 for single filers. The 28% bracket runs from $151,901 to $231,450 for joint filers and from $91,151 to $190,150 for single filers. The starting point for the 39.6 percent bracket for 2016 is $466,951 for joint filers and $415,051 for single filers.

  • 2016 Standard Deduction and Exemptions – The standard deduction remained the same as in 2016 at $12,600 on a joint return and $6,300 on a single return, while the personal exemption increased to $4,050 for each dependent. Thus, a single individual can generally earn $10,350 before it is necessary to file a return. That same individual could earn as much as $15,850 and pay no federal tax by contributing $5,500 to an IRA. This scenario works well for sole proprietor business owners who employ a child under age 21.

  • Capital Gains and Qualified Dividend Tax Rates – Long-term capital gains continue to be taxed at 0% if you are in the 10% or 15% regular tax bracket and 15% if you are in the four middle tax brackets. The statutory rate on gains for taxpayers in the top 39.6% bracket is 20%. However, if you include the 3.8% surtax on net investment income and gains, the overall rate on gains for higher income taxpayers will be 23.8%. Gains from the sale of collectibles and un-recaptured Code Sec. 1250 gains from the disposition of real property are taxed at 28% and 25%, respectively.

    Despite these highly publicized so called “favored” rates, there are many situations in which the effective rate on long-term capital gains is even higher than 23.8%. I am often asked “what will be the tax cost if I realize a gain from selling an investment.” You can’t just multiply the gain times the 15%, 20%, or 23.8 rate when attempting to figure out the tax cost of an expected gain. There is a ripple effect throughout the return from adding capital gain income because deductions and credits are reduced or eliminated as income increases. This drives up the effective rate to sometimes surprisingly high levels. Our tax system is AGI-driven. Numerous items of income, numerous deductions, and numerous credits are all based on the level of adjusted gross income. The higher the adjusted gross income, the higher the effective tax rate.

  • Personal Exemption Phase-out – The adjusted gross income threshold at which the personal exemption begins to phase-out has been raised to $311,300 for joint filers, $285,350 for heads of households, and $259,400 for unmarried individuals. Under the phase-out rules, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income (“AGI”) exceeds the applicable threshold. At the maximum end of the phase-out range, joint, head-of-household, and unmarried taxpayers will have no personal exemption(s) once their AGI reaches $433,800, $407,850 and $381,900, respectively.

  • Itemized Deduction Phase-out – Similar to personal exemptions, the adjusted gross income threshold at which itemized deductions begin to phase out has been raised to $311,300 for joint filers, $285,350 for heads of households, and $259,400 for unmarried individuals. Under these phase-out rules, the total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer's AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted each year. The phase-out does not apply to medical expenses, investment interest expense, casualty losses and wagering losses.

  • Alternative Minimum Tax (AMT) – The alternative minimum tax is a parallel tax computation under which certain deductions are not allowed. These include state and local income taxes, property taxes, miscellaneous itemized deductions The regular tax and the alternative minimum tax are calculated and compared, and the taxpayer pays the higher of the two. Essentially, AMT is a flat tax at 26% to 28% depending on the level of income after deducting an AMT exemption amount. For 2016 returns, the AMT exemption is $83,800 for joint filers and $53,900 for single filers. Both exemptions begin to phase out when alternative minimum taxable income goes above $159,700 and $119,700, respectively. If you find that you are in the position of paying AMT, then it is likely that you have high deductions for state and local income taxes, property taxes or miscellaneous itemized deductions such as mileage. In that case you should avoid prepaying any state and local taxes as they will be of no tax benefit. You could also reduce your mileage deduction and not pay any additional tax.

  • 3.8% Tax on Net Investment Income – Taxpayers in the higher tax brackets i.e. with modified adjusted gross income in excess of $200,000 ($250,000 joint) will continue to pay a 3.8% tax on income from investments. Net investment income includes, among other things, net gains from property held for investment and gross income from dividends, interest, royalties, annuities, rents, passive business activities, and business of trading in financial instruments or commodities. The tax also applies to a gain from the sale of a principal residence that exceeds the $250,000 and $500,000 exclusion amounts. It does not apply to net income from business activity unless it is passive, and it does not apply to distributions from a qualified plan or an IRA. Net investment income can be reduced by certain allocable investment expenses such as investment interest and state and local income taxes. The tax is calculated at 3.8% times the lesser of net investment income, or the amount by which modified adjusted gross income (as defined by the code for purposes of calculating net investment income) exceeds the above threshold amounts. The net investment income tax has been called the modern-day alternative minimum tax. That's because the threshold amounts are not indexed for inflation, which means 10 years from now, if it's still around, it will be much more widespread and affect many more taxpayers than it does today.

  • Additional .9% Medicare Tax on Earned Income – 2016 returns will also see a continuation of the additional .9% Medicare tax required to be withheld from the wages of single individuals who earn over $200,000 and married couples filing jointly who earn over $250,000. The tax is imposed on the portion of earned income that exceeds the threshold amount and must be paid with the taxpayer's return if it is not withheld. Self-employed individuals will have to allow for this tax when determining estimated payments.

  • Education Credits and Deductions:

    • American Opportunity Tax Credit ("AOTC") – The American Opportunity Tax Credit, which was due to expire at the end of 2018, was made permanent by the 2015 Path Act. The credit phases out for single individuals with modi¬fied AGI of from $80,000 to $90,000 and for married couples filing jointly with modified AGI from $160,000 to $180,000. The maximum credit is $2,500 per student and can be claimed in all four years of college. The definition of qualified higher education expenses includes tuition, fees and the cost of course materials, such as books and supplies. Forty percent of the credit is refundable, meaning it can result in a tax refund, not just bring the tax liability to zero.

      To be eligible, the student must be enrolled for at least one academic period in a degree, certificate, or other program leading to a recognized educational credential. The students must be at least “half-time,” meaning they carry at least half the normal full-time workload for the student’s course of study. Additionally, the student only needs to meet the half time requirement for one academic period during the tax year, and the tuition for all other academic periods during that year would count as an eligible expense towards the credit. No credit is allowed for any academic period in which the student has been convicted of a federal or state felony involving possession or sale of illegal drugs.

      If the parent taxpayers’ income is too high to take advantage of the AOTC, sometimes it is advantageous for the student/child to take the credit, assuming he or she has enough taxable income to benefit. For the child to be eligible, the parents must forego the dependency exemption, and the education expenses are deemed to be paid by the child. Coordination of the student/child’s tax return with that of the parents is critical in these situations to ensure that the lowest possible tax is paid by the family group as a whole.

    • Higher Education Tuition Deduction – The above-the-line higher education tuition deduction, which had expired at the end of 2014, was extended by the 2015 Path Act through 2016. The maximum deductible amount is $4,000 for taxpayers with adjusted gross income not exceeding $65,000 ($130,000 for joint filers). Taxpayers who exceed these income limits but do not exceed $80,000 ($160,000 for joint filers) may deduct up to $2,000 in qualified expenses.

      It is important to note that these incomes are not phase out ranges but absolute limits. Thus, a married couple with $160,001 of income can lose a $2,000 above-the-line deduction because of $1 of extra income. Further, coordination and comparison of education credits and education deductions must be evaluated to ensure that the optimal tax reduction strategy is used on the taxpayer’s return. This deduction expired at the end of 2016. It will not be available on 2017 returns unless extended by the incoming Congress in 2017 - not a likely scenario given the current tax overhaul climate in Washington today.

    • Teachers' Classroom Expense Deduction – The 2015 Path Act made permanent the above-the-line deduction for up to $250 per year of expenses for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom by eligible elementary and secondary school teachers. Expenses that exceed $250 and non-classroom supplies may be deducted as an employment-related miscellaneous itemized deduction subject to the two-percent floor for taxpayers who itemize.

    • Definition of Qualified Higher Education Expenses – This has often been an area of much confusion because certain expenses qualify for tax free distributions from Sec 529 Plans, but do not qualify for the tuition credit or deduction. For example, room & board is a qualified expense for purposes of Sec 529 Plans, but does not qualify for purposes of the AOTC education credit. The 2015 Path Act added a small measure of consistency in this area by including computers and technology-based costs in the definition of expenses deemed eligible for Sec 529 plan withdrawals and the AOTC.

    • Heightened verification processes and tax-preparer due diligence – In recent years, the number of improperly claimed education credits has been increasing. As a result, IRS revised Form 8863 in 2015 by adding a series of detailed questions that must be answered for each credit claimed. The 2015 Path Act also added heightened verification processes and tax-preparer due diligence requirements in order to reduce the number of improper credits. Beginning in 2016, taxpayers must have a Form 1098-T from the educational institution or an equivalent receipt containing the same information that would appear on the 1098-T in order to claim the credit. Tax preparers must document that they saw the 1098-T, and the EIN of the educational institution must be reported on Form 8863.

    • 1098-T reporting – One of the causes of improperly claimed credits has been a difference between the amount of tuition reported on form 1098-T by the educational institution and the proper amount of tuition eligible for the credit. IRS instructs the institution to report in box 1 payments received or in box 2 amounts billed. The majority report an amount in box 2 which is incorrect for cash basis tax reporting. There is also a question of whether the amount reported on the 1098-T is for the calendar year or the school year. This will be corrected in 2017 when educational institutions will be required to report tuition and expenses actually paid on the form. For 2016 however, merely transferring amounts from form 1098-T to the tax return is incorrect and taxpayers should provide documentation of all amounts paid whether by cash, check, credit.

  • Itemized Deductions:

    • Medical Expense Deduction Threshold – Medical expenses have to exceed 10% of AGI in order to be deductible. The threshold for taxpayers age 65 or older is still 7.5% until tax year 2017 when the higher threshold would apply to all taxpayers.

    • Medical Expenses for Dependents – A taxpayer may deduct medical expenses they pay for any person who qualifies as their dependent as defined in Code Sec.152. But, the dependent definition is expanded to include any relative who would have qualified as a dependent, but for the income limit, or anyone who would have qualified, but for the fact that they were claimed on another person’s return. In the case of divorced or separated parents, each parent can claim the medical expenses they actually pay for a child even though the other parent claims that child as a dependent on their tax return.

    • Qualified Medical Expenses – An extensive list of qualified, deductible medical expenses is available in Publication 502 at the IRS website www.irs.gov. Some examples of non-routine qualified medical expenses include:

      • Special equipment installed in a home, or improvements to a home if the main purpose is for medical care. If there is an increase in the value of the home as a result of the improvement, then that increase must be subtracted from the cost to arrive at the deductible medical expense amount.

      • However, certain improvements made to accommodate a taxpayer’s disabled condition such as construction of exit ramps, widening doorways, etc., do not usually increase the value of the home and are fully includable as a medical expense.

      • A portion of the monthly or lump-sum life care fee or “founders fee” paid under agreement with a retirement home which is properly allocable to medical care as determined by the home’s accountant is an eligible medical expense.

    • State and Local Sales Tax Deduction – The 2015 Path Act made permanent the election to deduct state and local general sales and use taxes instead of state and local income taxes. Taxpayers can use either actual sales taxes paid, or an amount from an IRS table based on income. The table amount can be increased by sales tax paid on the purchase of motor vehicles, boats, aircraft, homes, and materials used to build a home.

    • Property Taxes – As a general rule, a taxpayer can deduct property taxes only if he is the owner of the property and he pays the tax during the tax year. If the spouse owns the property and pays the taxes, the taxes are deductible on the spouse’s separate return or on the joint return.

    • Charitable Contribution Reminders – In order to deduct a monetary charitable contribution of any amount, the taxpayer must have a written communication from the charity, a bank statement, or a credit card statement. For donations of $250 or more, the taxpayer must have a written acknowledgment from the charity. Contributions are deductible in the year made, including those charged on a credit card before year-end. The charity must be a U.S. eligible charity for the donation to be deductible. No deduction is allowed for cash contributions without documentation, and contrary to popular belief, there is no minimum allowable contribution deduction amount. In short, everything needs to be documented or it could be disallowed.

    • Charitable Contribution Deductions (non-cash) – Deductions may be taken for the fair market value of donated used clothing and household items that are at least in "good used condition or better." The fair market value of non-cash property generally is the price for which it would sell on the open market. The burden of establishing the fair market value of the donated items is on the taxpayer seeking to deduct the donation. If the donated item exceeds $5,000 in value, the taxpayer is required to obtain a qualified appraisal and attach it to the tax return. If the property exceeds $500 in value, the taxpayer must obtain (but not attach) a written acknowledgment from the charity containing, among other things, a date and a description of the property. The taxpayer is also required to keep a written record containing: (1) the approximate date and manner of acquisition of the property, and (2) the cost or other basis of the property. Thus, taxpayers seeking to deduct the value of clothing and household items donated to Goodwill or other similar organizations should make sure they obtain dated receipts and keep lists or photographs of the items they donate. A useful website for valuing used clothing can be found at www.SalvationArmyUSA.org. Similar guidelines can be found at the Goodwill website (http://www.goodwill.org/wp-content/uploads/2010/12/Donation_Valuation_Guide.pdf)

    • Mortgage Insurance Premiums – The 2015 Path Act extended thru 2016, the deduction for mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's principal residence. The insurance contract for which the premiums are paid must have been issued after 2006. This deduction also expired at the end of 2016. It will not be available on 2017 returns unless extended by the incoming Congress in 2017 - not a likely scenario given the current tax overhaul climate in Washington today.

    • IRA Custodial and Management Fees – Fees paid to managers and custodians of IRA assets are deductible as a miscellaneous itemized deduction subject to the 2% of AGI floor, provided they are paid with funds from outside the IRA. However, commissions/fees for the purchase or sale of IRA securities paid with funds outside the IRA are deemed to be IRA contributions and are not deductible.

    • Legal Fees – Many taxpayers have a misunderstanding of the deductibility of legal fees. In general, legal fees qualify as a 2% miscellaneous itemized deduction, but only in limited circumstances. These include: (1) fees incurred in connection with tax advice, but not for drafting a will; (2) fees in connection with collecting alimony, but not to defend against a request for alimony; and (3) fees in connection with keeping a job or preserving income.

  • Children’s Issues:

    • Child Tax Credit – The $1,000 child tax credit for each child under age 17 was made permanent by the 2015 Path Act. The refundable portion of the credit remains at 15% of the taxpayer’s earned income in excess of $3,000. As in the past, a child who qualifies for the credit must also be the taxpayer’s dependent. This affects head of household filers with a qualifying child who is not claimed as a dependent. The child credit begins to phase out for single filers with adjusted gross income of $75,000 and for joint filers with adjusted gross income of $110,000.

    • Dependent Care Credit – For 2016 returns, the maximum amount of eligible expenses for the dependent care credit is $3,000 for one qualifying individual and up to $6,000 for more than one qualifying individual. The maximum credit is 35% of qualifying expenses. The percentage drops (but not below 20%) by one percentage point for each $2,000, or fraction thereof, of AGI above a $15,000 threshold amount.

II. BUSINESS TAXATION

  • Section 179 Deduction – The 2016 limit for the Section 179 deduction is $500,000 subject to a $2,010,000 overall investment limit. In general, qualifying property must be tangible personal property which is actively used in the taxpayer’s business and for which a depreciation deduction would be allowed. The property can be new or used, must be used more than 50% for business, and includes off-the-shelf computer software. Certain real property is also eligible for expensing such as qualified leasehold improvement property and restaurant and retail improvement property.

  • Bonus Depreciation – The 2015 Path Act extended through 2017 the provision under which taxpayers may deduct 50% bonus depreciation on qualifying capital expenditures. The 50% rate drops to 40% for property placed in service during 2018 and then 30% in 2019. After 2019, bonus depreciation ends unless the law is extended again. To qualify for bonus depreciation, the property must be: (1) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified building improvement property (formerly leasehold improvement property.) In addition, the use of the property must originate with the taxpayer, i.e. the property must be new.

  • Luxury Autos and "Heavy" SUVs – The first-year limit on depreciation for luxury passenger automobiles placed in service in 2016 is $3,160 for passenger vehicles and $3,560 for vans and trucks. However, this limit is increased by $8,000 when bonus depreciation is claimed for a qualifying vehicle placed in service during 2016. This results in a maximum first-year depreciation of no more than $11,160 for autos and $11,560 for vans or trucks. Remember that these are maximum limits based on 100% business use of the vehicle. If the business use of the vehicle falls below 50% in a subsequent year, then bonus depreciation must be recaptured. Also remember that the vehicle must be new in order to claim bonus depreciation.

    A luxury automobile is defined as a passenger automobile or a truck, van, or SUV with a gross vehicle weight of 6,000 pounds or less, and an original cost greater than $15,800. If the vehicle has a loaded gross weight in excess of 6,000 pounds, then it is not considered a luxury automobile for depreciation purposes, it is not subject to the depreciation limits, and it can be depreciated using the same rules as any other five-year asset, with the exception that the Section 179 deduction cannot exceed $25,000.

    As an example, if a taxpayer purchases a new SUV for $85,000 that weighs more than 6000 pounds and is used 100% for business, it is possible to deduct $67,000 in year one ($25,000 Section 179 expense, plus $30,000 bonus depreciation, plus $12,500 first year regular depreciation).

  • Standard Mileage Rates – The 2016 rate for business use of a vehicle is 54 cents per mile. The rate decreases to 53.5 cents for 2017. Remember, however, taxpayers claiming a deduction for business use of a vehicle are required to maintain a contemporaneous written record of each business trip. The standard mileage rate for medical miles is 19 cents for 2016 and 17 cents per mile in 2017. The mileage rate for charitable miles remains at 14 cents for 2016 and 2017.

  • Form 1099-MISC – In recent years, IRS has begun to focus more and more on compliance with 1099-MISC filing requirements. All business tax returns i.e., 1120, 1120-S, 1065, and Schedule C’s now contain the following questions: "Did you make any payments during the year that would require you to file Form(s) 1099? If yes, did you or will you file required Forms 1099?" If the business answers “no” to the second question, it is opening itself up to penalties. In order to be able to answer “yes” businesses need to understand the reporting requirements and take steps to affirmatively comply. Beginning in 2016, penalties for failure to file 1099 Forms have been increased and range from $260 per form to as much as $500 per form depending on if and when the delinquent form is subsequently filed after the original due date.

    The basic reporting rule is that businesses (not individuals) that make payments of $600 or more to individuals or partnerships for goods or services are required to report those payments as non-employee compensation in Box 7 of Form 1099-MISC. Payments to corporations are not reportable unless the payment is to an attorney or law firm. Payments to LLCs are reportable since most LLCs are taxed as a partnership on Form 1065 or as a sole proprietorship on Schedule C. Only if the LLC has elected to be treated as a Corporation would their payments not be reportable.

    The deadline for providing payees with a Form 1099-MISC is January 31. What's changed this year is that the government copy is also due on January 31, one month earlier than in the past. To meet this new deadline, businesses need to review all vendors to whom they have paid $600 or more during the year and then further classify those by type of entity. To document the type of entity and to ensure that the vendor’s tax ID number is on file, all vendors should be required to fill out a Form W-9 in order to be paid in the first place. This is one area where IRS clearly indicated that they are stepping up enforcement activity. They have less people to conduct audits, and they see 1099 reporting as a source of revenue.

  • New due dates for Business Tax Returns – The deadline for calendar year-end Partnership and S-Corporation tax returns this tax season has been moved up to March 15th. In contrast, C-corporation tax him returns are now due by April 15th. The extended due date for all three types of returns is September 15th.

III. RETIREMENT

  • Tax-Free Distributions from IRAs for Charitable Purposes – The 2015 Path Act made permanent the provision under which taxpayers age 70½ can make tax-free distributions from IRAs of up to $100,000 directly to a qualified charitable organization. While these distributions are not deductible, they are also not included in income which helps to minimize the effect of AGI-sensitive limitations such as the amount of social security benefits subject to tax, or the calculation of deductions based on a percentage of AGI.

  • Contribution Limits

    • IRA Contributions – The maximum IRA contribution for 2016 (traditional or Roth) is unchanged at $5,500. The catch-up contribution for ages 50 and older remains at $1,000. For 2017, both of these maximums again stay the same. For 2016, the limit on employee contributions to a Simple-IRA Plan was $12,500 with a catch-up limit of $3,000. These limits remain the same for 2017.

    • 401K Plans – For 2016, the maximum employee deferral into an employer 401K plan was $18,000 plus a $6,000 catch-up contribution if 50 years old. These limits again remain the same for 2017.

IV. FOREIGN FINANCIAL ACCOUNTS

This is an area that continues to be the focus of IRS and the Treasury Department attention. In general, US citizens (whether residing in the US or abroad) with any interest (including a mere signature authority) in a foreign bank account are required to disclose the existence of the account by answering “yes” to one of two questions at the bottom of Schedule B Interest and Dividend Income. Many taxpayers and tax preparers overlook these two questions and don’t even think about them. Tax software is often set to automatically answer “no” to these questions, unless affirmatively overridden by the preparer. If the aggregate value of all foreign accounts exceeds $10,000 at any time during the year, then the taxpayer is required to file a Form 114 (formerly known as TD F90-22.1, and commonly known as an FBAR (Foreign Banks and Financial Report). Failure to file an FBAR can subject a taxpayer to fines as large as $500,000 and criminal prosecution.

Since 2009, the Treasury Department has carried out three initiatives that offered amnesty and limited penalties to taxpayers who voluntarily came forth, disclosed the existence of their foreign accounts, paid any taxes due on unreported income and filed any unfiled FBARs. The objective of these initiatives was to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws. Over the years, IRS has made changes to the initiatives including the penalty percentages to encourage more individuals with offshore accounts to come forward. The latest iteration, known as the 2014 OVDI Program, includes a separate “streamlined” component which provides for a 5% penalty if it can be shown that failure to file FBARs was not willful. By contrast, the regular OVDI program penalty is calculated at 27.5%. Both programs are still open to taxpayers who want to make a voluntary disclosure. They are, however, vastly different in terms of the stated penalty amount and exposure to further sanctions.

If you have an interest in a foreign financial account and are concerned about complying with the existing disclosure requirements, please be sure to contact me for a consultation. At a minimum, it is critical that any taxpayer with a foreign account properly and accurately answer the two questions at the bottom of Schedule B.

Continuing the theme of tax compliance in this arena, taxpayers with foreign financial assets in excess of certain thresholds are required to file Form 8938 (Statement of Specified Foreign Financial Assets) on which they are required to report specific types and amounts of foreign financial assets or accounts. For example, a married couple living in the US and filing a joint return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year, or totaled more than $150,000 at any time during the year. It is important to note that Form 8938 does not in any way replace the FBAR reporting requirements. However, the form is not required to be filed if the taxpayer does not have to file an income tax return.

It is important to note that FBARs must now be filed electronically and are due by April 15. However they can also be extended. It is also important to note that the amnesty programs available to taxpayers who come forth with voluntary disclosures will not last indefinitely. It is unknown how long IRS will continue to make limited penalties available under amnesty programs. Those programs could end at any time.

V. PRESIDENT DONALD TRUMP'S AND HOUSE REPUBLICAN TAX PROPOSALS

With the new administration in Washington this month, one of the most highly debated topics for 2017 appears to be how taxation will change under the new administration. Many proposals have been floated both before and after the election. Here is a brief summary of Trump's proposals and those of the House Republican leadership.

Tax rates
  • Collapse the current seven tax brackets to three brackets.
  • Low income Americans will have an effective tax rate of zero.
  • Retain the existing preferential rate structure on capital gains and qualified dividends with a maximum tax rate of 20%.
  • "Carried interest" earned by certain investment managers will be taxed as ordinary income and not as capital gains.
  • The 3.8% Obamacare tax on investment income will be repealed.
  • The alternative minimum tax will be repealed.
  • The head of household filing status will be eliminated.
Brackets and Rates - Joint Returns
  • Less than $75,000 - 12%
  • More than $75,000 but less than $225,000 - 25%
  • More than $225,000 - 33%
Brackets and Rates - Single Returns
  • Less than $37,500 - 12%
  • More than $37,500 but less than $112,500 - 25%
  • More than $112,500 - 33%
Deductions
  • Increase standard deduction for joint filers to $30,000 from $12,600.
  • Standard deduction for single filers will be $15,000.
  • Personal exemptions will be eliminated.
  • Itemized deductions will be capped at $200,000 for married joint filers or $100,000 for single filers.
By comparison, the House Republican tax proposal includes the following:
  • Standard deduction for joint filers will be $24,000.
  • Standard deduction for single filers with a child will be $18,000.
  • Standard deduction for single filers without a child will be $12,000.
  • 50% of net capital gains, dividends, and interest income may be deducted, leading to basic rates of 6%, 12.5%, and 16.5% on investment income depending on the individual's tax bracket.
  • All itemized deductions except mortgage interest and charitable contributions will be eliminated.


Federal Estate & Gift Taxes
  • Will be repealed.
  • Capital gains would be taxed at death, but subject to an exemption of $10 million for married couples and $5 million for individuals.
Childcare
  • There will be an above the line, non-refundable deduction for children under age 13 for up to $5,000 of expenses which will be capped at the State average cost of care for the age of the child.
  • Childcare deduction will not be available to taxpayers with total income over $500,000 for joint filers or $250,000 for single filers.
  • Childcare deduction will be provided to families who use stay-at-home parents or grandparents as well as those who use paid caregivers.
  • Childcare exclusion would be limited to four children per taxpayer.
  • All taxpayers would be able to establish dependent care savings accounts ("DCSA") for the benefit of specific individuals including unborn children.
  • Contributions to a DCSA would be limited to $2,000 per year from all sources.
  • Funds remaining in the account could be used for education expenses once the child reaches 18, but additional contributions could not be made.
  • Government will provide 50% match on parental contributions of up to $1,000 per year for low income households.
  • All deposits and earnings in the DCSA account will be tax-free, and unused balances can be rolled over year-to-year.
By comparison the House Republican tax proposal calls for the following:
  • The child credit and personal exemption for dependents would be consolidated into an increased child credit of $1,500. The first $1,000 would be refundable. A nonrefundable credit of $500 will also be allowed for non-child dependents.
  • Married couples would be able to earn up to $150,000 before the child credit starts to phase out.
Business Taxes
  • The tax rate would be lowered from 35% to 15% for all businesses small and large.
  • The corporate alternative minimum tax would be eliminated.
  • There would be a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%.
  • Owners of pass-through entities (sole proprietorships, partnerships, and S-Corps) could elect to be taxed at a flat rate of 15% on their pass-through income, rather than at the regular income tax rate.
  • However, distributions from large pass-through businesses (yet to be defined) received by owners who elected the flat 15% rate would be taxed as dividends.
  • The 18% rate differential (top individual rate 33% minus flat rate of 15%) would likely cause many existing business wage earners to re-define their form of entity to sole proprietor or other pass-through entity format.
By comparison the House Republican tax proposal calls for a 25% tax rate on small businesses and pass through entities, and a flat 20% corporate tax rate.

Much has been written, and there are numerous analyses of Trump's tax plan ranging from descriptions of specific changes to the economic impact of each and every aspect of change. Trump himself has outlined varying proposals which have changed many times from before the election to now. For example, in a number of speeches Trump spoke about repealing the entire Affordable Care Act including all of its tax provisions. To date, however, only repeal of the 3.8 % net investment tax has been specifically mentioned for elimination.

The nature, timing, and extent of the overhaul of our tax system remains to be seen. As I write this update, there is a lot of uncertainty. Nobody likes uncertainty, especially the financial markets. One thing is certain though, there will be changes, and they will likely occur early in the new administration.

VI. IDENTITY THEFT

Over the course of the last three tax seasons, tax-related identity theft and refund fraud have increased significantly. The most common way that taxpayers become aware that their tax account has been compromised is when the taxpayer’s electronically filed return is rejected because a return had already been filed with the taxpayer’s social security number on it. A variation of this is when a return has already been filed which contains the tax ID number of a dependent. In most cases like this, the return in the IRS system was filed early in the filing season and it resulted in a refund being issued. There have also been instances where IRS suspects there is something wrong with a return because nothing on it matches returns filed in previous years or nothing matches current-year information in their system such as W-2s and 1099s, and they issue a letter to the taxpayer asking for more information about items reported on the return. In these situations, there is usually nothing on the fraudulently filed return that even remotely belongs to or relates to the taxpayer except for the name, address, and tax ID number.

In response to this growing problem, IRS has partnered with the tax preparation industry (tax preparers and tax software companies) to enhance controls. For example, our tax preparation software now has numerous levels of security built into it. In addition, IRS has already announced that refunds will be delayed in certain circumstances including returns with refunds attributable to the earned income credit.

If you were a victim of tax related identity theft in a prior year, IRS assigned you an identity protect personal identification number (IP PIN) in order to ultimately electronically file your tax return that year. Once that occurred, you will need a pin number to continue filing electronically for at least the next four years. At the start of each tax filing season, both spouses will be sent a new pin number by mail. We will need those pin numbers in order to electronically file your return in 2016. If you cannot find the letter, please contact IRS immediately. They will not give you the pin number by phone but rather will send you another letter once you inform them that you need one.

Once again, if you suspect you have been a victim of tax related identity theft, the IRS website www.irs.gov contains detailed information about what to do. There are three basic steps to take: (1) call the Identity Protection Specialized Unit (800-908-4490); (2) file Form 14039; (3) respond to the phone number on an IRS notice if that is how you found out about the problem in the first place. Of course you are welcome to call us as well.

VII. "PHISHING" SCAMS

In the past two years, I have received numerous phone calls from panicked clients who had just received a threatening call from someone alleging to be an IRS agent. The call usually involves the “agent” warning the client that they have a past due IRS debt and that they will be arrested or suffer some other repercussion if they do not immediately pay the balance due by credit card over the phone, or by some other means. Some of the phone calls have been so ridiculous it is hard not to realize a scam is taking place. For example, in several instances the caller stated that payment should be made by means of gift cards purchased from a retail establishment.

This is known as “phishing” and is prominently addressed in detail on the IRS website www.irs.gov. Most people eventually come to realize that the call is a scam, but not before some degree of panic runs through them. If you happen to be the recipient of such a phone call or even a voice mail message, please remember the following – IRS does not communicate with taxpayers by phone call and never by email. They may call someone in connection with an ongoing matter once someone is assigned to it. But they will not initiate a matter by phone and they will never request a payment by credit card over the phone. Keep this in mind should you be one of the lucky ones the next time Phishing scams pop up.