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Archives for New Tax Law (2018)

AirBnB (Vacation Home) Potential Increased Tax Deductions for Owners

The IRS has announced they will issue regulations that would prohibit taxpayers from claiming a charitable contribution deduction for amounts for which the taxpayer claimed a state tax credit. Governor Jerry Brown (California) vetoed SB 539, which the Legislature had hoped would allow taxpayers to claim a charitable contribution deduction for donations to the College Access Tax Credit Fund. And the states of New York, Connecticut, Maryland, and New Jersey have sued the U.S. government in federal court seeking to invalidate the $10,000 limitation on state and local taxes. The battle continues, but in the meantime, taxpayers with a second or vacation home should begin planning to implement a workaround strategy to the deduction limitation.

One strategy to consider is the allocation of mixed-use expenses for vacation homes. Vacation homes are properties used by the taxpayer for some days of the year and rented to third-parties for other days of the year. A vacation home is not a rental property which is rented (or held out for rent) for 365 days of the year. A vacation home is not a personal residence which is the home you live in, and it is not a second home that you own which is not rented at all (such as a vacant home or house you use periodically throughout the year with no rental days).

The IRS and courts are in disagreement with the expense allocation method. The IRS method was not taxpayer-friendly under the old law, but it is favorable to taxpayers under the new law because their method allocates more of the property taxes to rental use; thereby, increasing the property tax deduction carryforward. Your property taxes allocated to rental use can be carried forward indefinitely to offset future rental income which is more favorable because you cannot carry forward property taxes reported as Schedule A Itemized Deductions. The limited tax deduction is lost forever. You may have used the court method in the past, but with proper tax planning, you may want to switch to the IRS method. The following link is to an example that illustrates the tax benefit of using the IRS method. And remember state law may be different.

IRS and Court Method Example

Line 8 shows the larger tax deduction carryforward using the IRS method. So the future tax savings, assuming a 40 percent tax rate, is about $9,000.

A second strategy is to rent your second home. If you rent your home for less than 15 days, the rental income is not taxable. If you rent the house for more than 15 days, you may be able to offset your rental income by the allocated expenses (including the previously disallowed property tax deductions). You need to run tax projections to confirm the amount of taxable income generated by this strategy.

Call us at (323) 285-9880 if you have any questions about the allocation of mixed-use expenses for vacation homes. We have the knowledge and skill to calculate complicated income tax projections. Call us at (323) 285-9880.

Disclaimer: Tax laws are complicated, and your taxes are unique to you. A law favorable to you may not be beneficial to the next person because the facts and circumstances are different. Our emails are very broad and do not provide specific tax advice to you for which you can use for tax planning purposes. Therefore, we highly recommend you contact us before taking any action concerning the content of this email.

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No More Casualty Loss Deductions

Congress eliminated the personal casualty loss deduction with the passage of the tax law last December unless the taxpayer’s loss is in a federally declared disaster. Taxpayers will no longer get tax relief through tax refunds generated by loss deductions. So it is essential that you check your property insurance coverage to ensure your property is adequately insured.

Here are a few examples of personal casualty losses:

  1. Your house burns down
  2. You total your car in a wreck
  3. A windstorm damages your trees and fence

Usually, the amount of the loss is what you paid for the property or the decline in the property’s value (whichever is less). The loss amount is reduced by the amount of insurance received.

Deduct losses sustained in a federally declared disaster in the year the damage occurred. However, deduct casualty losses suffered in a federally declared disaster area in the year of the casualty, or you can make an election to deduct the casualty loss in the previous calendar year. Note that federally declared disasters are not the same as federally declared disaster areas. The IRS will send your refund faster if your loss occurs in a disaster area and you make the prior-year election. Different rules may apply for state income taxes.

Call us at (323) 285-9880 if you have any questions about the personal casualty loss deduction.

Disclaimer: Tax laws are complicated, and your taxes are unique to you. A law favorable to you may not be beneficial to the next person because the facts and circumstances are different. Our emails are very broad and do not provide specific tax advice to you for which you can use for tax planning purposes. Therefore, we highly recommend you contact us before taking any action concerning the content of this email.

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How to Retain Property Tax Deductions

The new tax law limits property tax deductions to $10,000 and eliminates miscellaneous itemized deductions. So you may be fussing about the loss of your tax deductions, but there is an election you may be able to make to capitalize these expenses which would be beneficial to you. 

A recent tax court case highlights the strategies the IRS will take to limit your tax deductions. And the amount that is not deductible is lost forever unless you make a “carrying charges” election. 

The taxpayer paid property taxes for land and reported property tax deductions on Schedule C and E (not Schedule A). The property was not rented to third parties, so the IRS argued, and the court agreed, the property taxes are reportable on Schedule A. So why does the schedule matter? 

Taxes reported on Schedule A are subject to the $10,000 limitation; however, amounts reported on Schedules C and E are not. The taxpayer was deducting 100% of taxes but lost the tax deductions when the IRS moved them to Schedule A. What can you do to retain the deduction? 

You can make an election to add the taxes to the property’s cost basis. You will not get a current year tax deduction, but the election will increase the property’s cost basis which will reduce your taxable gain when you sell the property. So by making the election, you have retained your tax deduction which would have been lost forever without the election. 

Our company has experience with this election, and we are available to assist you. Please call us at 323-285-9880 for additional information.

 

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Employee Business Expenses Still Deductible

 Don’t throw away your receipts yet! Employee business expenses are still tax deductible on your California income tax return.

The new federal tax law eliminated the deduction for out-of-pocket employee business expenses. But state law still allows the deduction. The deduction can be sizable if you are in a high tax bracket. The highest state tax rate is 13.3% which includes the mental health services tax. For example, assuming you can deduct $10,000 for business expenses, your state taxes would be $930 less if you are in the 9.3% tax bracket.

Did you get a letter from the Franchise Tax Board? The FTB is mailing letters to taxpayers who have deducted employee business expenses. The mailing reminds taxpayers of their responsibility to file accurate tax returns, deduct only allowed out-of-pocket costs, and maintain adequate receipts. If you get a letter, the FTB believes you are deducting amounts higher than they expect to see on your tax return. They are not auditing your tax return. But receiving this letter could be a warning of a possible audit. Shown below is a list of common problems with this deduction.

  • Your employer may have a reimbursement policy. Tax rules will not allow you to deduct expenses that are reimbursable by your employer regardless of whether or not you file an expense report requesting reimbursement. If you are audited, the auditor will request a copy of your employer’s policy and may contact your employer to verify the policy is valid.
  • Driving to and from your office and home are commuting miles which are not tax deductible. Special rules apply to taxpayers who qualify for the home office deduction.
  • Clothes and uniforms not required by your employer are not tax deductible.
  • No receipts or mileage logs to prove your deductions.

Remember to keep your receipts, ask your employer for a copy of the reimbursement policy, and maintain a log that records your business miles that were driven and the purpose of your trip.

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Where did the marriage penalty go?

The federal “marriage penalty” affects couples whose combined taxable income exceeds $600,000. These couples pay 37% tax on income that exceeds this amount. However, two individuals filing separate returns would not be taxed at 37% until their combined income exceeds $1 million. This phenomenon is called the “marriage penalty.” Under the old law, the penalty applied to couples whose combined taxable income exceeded $156,150.

California does not have a marriage penalty based on tax brackets. But the state’s mental health services tax penalizes couples whose combined taxable income exceeds $1 million. At this level of income, married couples pay more health services taxes compared to individuals because California law does not increase the $1 million amount to $2 million for couples. So the taxable income for two individuals filing separate returns can be $2 million before paying the tax.

In some cases, California Registered Domestic Partners will pay less tax than either married couples or individuals who are not married.

Our firm assists clients with pre-marriage tax planning, and we are experts at tax planning for Registered Domestic Partners. Call us at (323) 285-9880 or send us an email if you have tax planning questions.

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You may be under-withheld!

The new tax law lowered income tax rates and eliminated exemptions. It also reduced the state income tax deduction to $10,000 (max) and eliminated deductions for employee business expenses not reimbursed by an employer.

 

IRS withholding tables issued on January 11th reflect the lower tax rates and no exemption deductions. But the charts do not factor the loss of employee business expenses and state income tax deductions. So you may not be paying enough tax with your withholdings and could owe more money than you expected with the filing of your 2018 tax return.

 

The IRS will publish an income tax calculator in February which will allow employees to adjust their withholdings so their taxes are not under (or over) withheld. Congress gave the IRS one year to fix the withholding tables to conform to the new laws. So you may need to take action now to ensure you do not have a significant balance due when you file your income tax return.

 

Also, employees paid bonuses, stock options, and commissions are at risk of under-withholding because the withholding rate for this income is now 22% (formerly 25%).

 

And remember penalties still apply to underpaid taxes. The penalty rate is currently 4%.

 

We will post a link to the income tax calculator on our website when the calculator is available. Contact us if your tax situation is complicated. We have the knowledge and skill to calculate complicated income tax projections. Call us at (323) 285-9880.

 

It is still early in the year, so now is the time to find out if you are underpaying your taxes. You will have the rest of the year to pay taxes with increased withholdings.

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New Tax Laws (2018)

Commentary about the new tax laws is fast and furious. We would give you quick answers about the computation of the new business deduction, a possible change in tax status, and other unintended effects if this information were available. As your trusted adviser, we cannot give you quick answers that are relevant to you because everyone’s tax situation is unique to them.

Based on commentary, there may be changes to the types of businesses which qualify for the 20% deduction. The ABA, AICPA, and AMA (attorneys, accountants, and doctors) are very vocal with their disapproval on the restrictions of the tax rate decrease to owners of service industries ($315,000 of taxable income). We are hoping for changes. (One suggestion – consider increasing your retirement plan contributions to decrease your tax rate.)

The law eliminated exemptions. The IRS is still trying to change instructions for Form W-4 and the withholding tables. The rule makers have not started analyzing the changes in tax filings and rules resulting from the new act. So we do not have their interpretations, examples, and guidelines for implementing the new law.

Most of the changes apply to tax years beginning after December 31, 2017. Quick answers are not always the right or most correct answers. We are studying the new law and will be posting to our website and sending out updates to our social media channels.

Please contact us if you would like to conduct a more in-depth analysis of the tax implications for you.

Happy New Year!

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