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Written by: Marvin J. Williams, JD, MBA, CPA, CMA, CFM, CGMA

Published: 08 August 2018

The Tax Cuts And Jobs Act ("TCJA") was passed by the United States Congress on December 20, 2017 and signed into law on December 22, 2017. The effective date of the new tax provisions is January 1, 2018. This sweeping change in the tax laws will have impact on essentially all taxpayers, individuals and businesses. The purpose of this brief article is to highlight the significant provisions of the new tax law and provide basic illustrations of the impact of the new tax law as compared to the immediate prior tax laws in a variety of settings for individual taxpayers.

Significant provisions of TCJA:

ITEMIZED DEDUCTIONS

As shown below, the (Regular) Standard Deduction for all taxpayers has been significantly increased under the new tax law. As a consequence, taxpayer's ability to qualify to Itemized Deductions will significantly diminish under the new tax law. With Schedule A (Itemized Deductions) being perhaps the most audited tax form, taxpayer compliance will greatly increase under the new tax. Some of the most notable changes in Itemized Deductions (and other provisions) under TCJA are discussed below.

STATE AND LOCAL TAXES
Itemized Deductions for State And Local Taxes are now capped at a maximum of $10,000 ($5,000 for Married Filing Separately taxpayers) per year. This limitation will have potential significant impact on taxpayers in jurisdictions with high State And Local Income Taxation and less impact on taxpayers in states such as Texas (and the other six (6) states) that have no State Income Taxation. (However, this will impact taxpayers in the State Of Texas as Sales Taxes have been typically deducted as Itemized Deductions in lieu of State And Local Income Taxes as Sales Taxes (State And Local) also fall under this $10,000 ($5,000) annual limitation).

PROPERTY TAXES
The deductibility of Property Taxes on real estate (and in certain cases Personal Property) are likewise subject to the $10,000 ($5,000) annual limitation on the deductibility of State And Local Taxes under TCJA.

QUALIFIED RESIDENCE INTEREST (MORTGAGE INTEREST)
TCJA brings significant changes regarding the deductibility of Qualified Residence Interest (Home Mortgage Interest). Under TCJA, the maximum qualified indebtedness (Acquisition Debt (Indebtedness)) in which interest can be computed for deduction purposes is $750,000 ($375,000 for Married Filing Separately taxpayers), down from $1,000,000 ($500,000 Married Filing Separately taxpayers) under prior tax law. (The new limits apply to debts incurred after December 15, 2017). Moreover, the deductibility of Home Equity Loan Interest has been substantially reduced (limited only to home equity loans used to buy, build or substantially improve the taxpayer's home that secures the loan) under the new tax law.

PERSONAL CASUALTY LOSSES
Personal Casualty Losses for fire, storm, shipwreck, theft and other casualties which have been permitted for many, many years have been repealed under TCJA except in cases of Personal Casualty Losses arising from federally declared natural disasters (subject to the same $100 per casualty floor and ten percent (10%) of Adjusted Gross Income (AGI) as before under prior law.). This is another area where compliance has been of concern which such concern is greatly reduced with this new provision in TCJA.

CHARITABLE CONTRIBUTIONS
TCJA increase the limitation on charitable contributions to sixty percent (60%) (from fifty percent (50%)) of the taxpayer's Adjusted Gross Income (AGI) for a given year for cash contributions. As under prior tax law, cash contributions in excess of this sixty percent (60%) limit may be carried forward to the next five (5) succeeding tax years in order of time. Despite the increase in the allowed annual limitation for cash contributions, charitable contributions may decline in future years as the higher (Regular) Standard Deduction discussed below will prevent many taxpayers from qualifying to Itemized Deductions and, thereby, reduce incentive by those taxpayers to make Charitable Contributions.

MEDICAL EXPENSES
For the year of 2018, deductible Medical Expenses must exceed seven and one-half percent (7.5%) of the taxpayer's Adjusted Gross Income (AGI) for all taxpayers. Beginning January 1, 2019, deductible Medical Expenses must exceed ten percent (10%) of the taxpayer's Adjusted Gross Income (AGI) for all taxpayers. This ten percent (10%) limit has been the case since 2013 for taxpayers not age 65 or older but this new provision beginning in the year of 2019 now applies to taxpayers age 65 or older as well as all other taxpayers. (These percents also apply to the Alternative Minimum Tax (AMT) for each respective tax year).

TAX PREPARATION FEES
Tax Preparation Fees are no longer deductible under TCJA which such were allowed with other Miscellaneous Itemized Deductions that exceeded two percent (2%) of the taxpayer's Adjusted Gross Income (AGI) under prior tax law.

EMPLOYEE BUSINESS EXPENSES
Unreimbursed Employee Expenses are no longer deductible as Miscellaneous Itemized Deductions (that exceeded two percent (2%) of the taxpayer's Adjusted Gross Income (AGI)) as under prior tax law.

PROFESSIONAL AND UNION DUES
Professional And Union Dues are no longer deductible as Miscellaneous Itemized Deductions (that exceeded two percent (2%) of the taxpayer's Adjusted Gross Income (AGI)) as under prior tax law.

OVERALL LIMITATION
The Overall Limitation of Itemized Deductions for high income taxpayers is eliminated under TCJA.

OTHER DEDUCTIONS

ALIMONY PAYMENTS (INCOME)
For the year of 2018, deduction for Alimony Payments and inclusion of Income for the recipient remains the same as under prior law. However, no deduction is allowed for Alimony Payments for Divorce Decrees executed after December 31, 2018. Likewise, no Taxable Income is incurred by the recipient of the Alimony Payments as was the case under prior tax law.

MOVING EXPENSES
Moving Expenses are no longer deductible for the taxpayer under TCJA beginning January 1, 2018 (except from members of the Armed Forces who move pursuant to permanent orders). In addition, the reimbursement of Moving Expenses by the employer will now be treated as taxable income to the employee (and deductible by the employer) under TCJA and not tax-free as was the case under prior tax law.

EDUCATION PROVISIONS

EMPLOYER EDUCATION PAYMENTS
The tax-free provision of Employer Education Payments made on behalf of employees continues under TCJA (at a maximum of $5,250 per year). PAYMENTS TO 529 PLANS Payments to Qualified 529 Plans are now expanded beyond post-secondary education expenses to include K-12 private school education expenses. Contributions (up to $10,000 per year per student (designated beneficiary)) to Qualified 529 Plans are not deductible but the earnings are tax-free when used for qualified education expenses of the designated beneficiary.

STUDENT LOAN INTEREST
Student Loan Interest deduction remains unchanged under TCJA. (An annual deduction of a maximum of $2,500 is allowed as under prior tax law subject to phase-out for higher income taxpayers).

STANDARD DEDUCTION
As stated above, TCJA greatly increased (nearly doubled over the most recent tax year) the Regular Standard Deduction for all taxpayers. Beginning January 1, 2018, the Regular Standard Deduction for taxpayers by Filing Status is as follows:

These substantial increases in the Regular Standard Deduction will greatly reduce the number of taxpayers that will qualify to Itemized Deductions. As a result, taxpayer compliance will significantly increase. The Additional Standard Deduction for taxpayers age 65 or older and/or blind continues as under the prior tax law. (All Standard Deductions (Regular and Additional) will be adjusted (indexed) annually for inflation).

PERSONAL EXEMPTION

The Personal Exemption ($4,050 each for the most recent tax year) for the taxpayers and their dependents is entirely eliminated under TCJA. The impact of this elimination will be somewhat offset by the increased Regular Standard Deduction discussed immediately above and the increased Child Tax Credit discussed below. In addition, the elimination of the Personal Exemption will also have significant impact in regards to taxpayer compliance as in prior tax years a dependent has often been claimed on more than one (1) tax return. The elimination of the Personal Exemption will have a very positive impact on overall taxpayer compliance in future tax years as the claiming of the same dependent on more than one (1) tax return will no longer be possible.

TAX CREDITS

AMERICAN OPPORTUNITY TAX CREDIT
The tremendous popular and beneficial American Opportunity Tax Credit will remain unchanged under TCJA. The American Opportunity Tax Credit is a maximum of $2,500 per year ($1,000 refundable per year) per eligible student for the first four (4) years of post-secondary education (enrolled at least half-time).

LIFETIME LEARNING TAX CREDIT
The Life Learning Tax Credit will remain unchanged under TCJA. The Lifetime Learning Tax Credit is a maximum of $2,000 per year for all eligible students (not refundable) with no time limit or minimum enrollment requirement.

CHILD TAX CREDIT

The Child Tax Credit under TCJA has been increased to $2,000 per eligible child with a maximum of $1,400 refundable from $1,000 per eligible child and a maximum of $1,000 refundable under the immediate prior tax law. The age of the eligible child remains as under the age of 17 as under prior tax law. The beginning of the phase-out of the Child Tax Credit is greatly increased (more than doubled) and the earned income requirement slightly lowered for the refundable portion of the credit. This increase in the Child Tax Credit somewhat offsets the impact of the complete elimination of the Personal Exemption under TCJA discussed above.

FAMILY FLEXIBILITY CREDIT
Related to the Child Tax Credit, a $500 Family Flexibility Credit (not refundable) applies for dependents that are not a child of the taxpayer subject to the same phase-outs as the Child Tax Credit.

INDIVIDUAL TAX RATES

Under TCJA, the number of individual tax rates remain at seven (7) total Tax Rates as under the immediate prior tax law but the rates now range from 10% to 37% as opposed to 10% to 39.6% under the immediate prior tax law. The seven (7) Tax Rates under TCJA are lower at each comparable level except for the first Tax Rate of 10% and the sixth rate of 35% and applies mostly to a higher range of Taxable Income at each Tax Rate level.

CAPITAL GAIN TAX RATES

Under TCJA, the Capital Gains Tax Rates for Qualified Dividends and Long-Term Capital Gains remain the same as under immediate prior tax law of 10%, 15% and 20% with slight acceleration of when the Capital Gain Tax Rates apply (not exactly matching the Tax Brackets as under prior tax law): 0% almost all of the two (2) lowest tax brackets, 15% almost for the next five (5) tax brackets and 20% for most of all of the highest tax bracket.

ALTERNATIVE MINIMUM TAX

The Alternative Minimum Tax Exemption for individuals have greatly increased beginning January 1, 2018 under TCJA. The Alternative Minimum Tax Exemption for 2018 for individuals by Filing Status is as follows:

The beginning of the phase-out of the Alternative Minimum Tax Exemption has been greatly expanded allowing most taxpayers to retain the full Exemption Amount. Moreover, the Alternative Minimum Tax Rates of 26% of the first $175,000 ($87,500 for Married Filing Separately taxpayers) of Alternative Minimum Taxable Income and 28% for Alternative Minimum Taxable Income in excess of $175,000 ($87,500 for Married Filing Separately taxpayers) is the same under TCJA as under immediate prior tax law (adjusted annually for inflation with the 2018 adjusted amounts being the first $191,500 ($95,750 for Married Filing Separately taxpayers) of Alternative Minimum Taxable Income and 28% for Alternative Minimum Taxable Income in excess of $191,750 ($95,750 for Married Filing Separately taxpayers). However, the significant increase in the Alternative Minimum Tax Exemption will result in many taxpayers not being subject to the Alternative Minimum Tax under TCJA as opposed to immediate prior tax law. (The Alternative Minimum Tax Exemptions shown above and the beginning of the phase-out amounts will be adjusted (indexed) annually for inflation).

BASIC ILLUSTRATIONS OF IMPACT OF NEW TAX LAW

The impact of the myriad of changes in the new tax law will vary from taxpayer to taxpayer depending on many factors such as the make-up of their family unit, whether they qualified for Itemized Deductions under prior tax laws and the like. Below are hypothetical scenarios of individual taxpayers comparing the tax results for the year of 2018 of the new tax law (TCJA) and the immediate prior tax law.

 *  Based on projected Personal Exemption amount for 2018 before the passage of TCJA of $4,150, Regular Standard Deduction of $6,550 (Single), $9,550 (Head Of Household) and $13,000 (Married Filing Jointly) and ranges of Taxable Income for each Tax Rate (And Exclusive of Alternative Minimum Tax and Net Investment Income Tax, if applicable).

** All under the age of seventeen (17) years of age (Child Tax Credit of $2,000 per eligible child is taken into account in determining the Net Tax Liability for TCJA computations above where applies) (Child Tax Credit of $1,000 per eligible child is fully phased-out in both cases above for the Prior Tax Law computations)

CORPORATIONS

The two (2) most profound impact of TCJA as it relates to corporations is the introduction of a single Tax Rate ("Flat Rate") of 21% (regardless of the level of taxable income) (down from a maximum Tax Rate of 35% under immediate prior tax law) and the elimination of the Alternative Minimum Tax (AMT) for corporations both effective January 1, 2018. (The AMT credit carryovers from prior tax years will still be allowed going forward to the extent of the Regular Tax Liability. Moreover, to the extent that the AMT credit carryover exceeds the Regular Tax Liability, fifty percent (50%) of the excess AMT credit carryovers will be refundable in 2018, 2019 and 2020 and the remainder fully refundable in 2021). The impact of these two (2) changes will have enormous impact on many corporations and, as a consequence, the United States economy. It will be interesting to learn in the next few years the extent of this impact on corporations and the United States economy.

PASS THROUGH ENTITIES (SOLE PROPRIETORS, PARTNERSHIPS, S CORPORATIONS, ETC.)

A special deduction for non-corporate taxpayers of twenty percent (20%) of Qualified Business Income (QBI) earned in a trade or business is allowed under TCJA subject to certain limitations.

ESTATES GIFTS AND TRUSTS

The Income Tax Rates for Estates And Trusts are slightly lowered under TCJA with the same ranges of Taxable Income as the immediate prior tax law (although a higher rate applies to the next highest range of Taxable Income). In addition, the tax-free portion of an Estate ("Exemption Equivalent") for Estate And Gift Tax purposes has increased (doubled) from $5,000,000 to $10,000,000 adjusted annually for inflation. The 2018 adjusted amount is $11,180,000. The Estate And Gift Tax rates remain the same (18% to 40%). Moreover, the Alternative Minimum Tax still applies for Estates and Trusts under TCJA with an Alternative Minimum Tax Exemption of $24,600 for the year of 2018 (adjusted annually for inflation) and the same Tax Rates and ranges of Taxable Income as for individuals.

REFERENCE

H.R. 1 (2018) PUBLIC LAW 115-97– TAX CUTS AND JOBS ACT

INTERNAL REVENUE SERVICE (IRS) WEBSITE (www.irs.gov)

Marvin J. Williams, JD, MBA, CPA, CMA, CFM, CGMA - Professor OF Accounting and Taxation (Unuversity OF Houston-Downtown)

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Written by: Vani Murthy, CPA

Published: 12 April 2018

Consequence of Filing Your Tax Return Late or Failure to Pay Taxes

By: Vani Murthy, CPA, M.S. Tax

Here are some simple steps to avoid a late filing or payment penalty, or both:

1. File an Extension
It gives you an additional six months to get organized and file your taxes. It is as simple as mailing the extension request or submitting electronically. However, an extension request must report the full amount of properly estimated tax. Make sure to file an extension containing the appropriate information, as the penalty for not filing a timely tax return can add up quickly.

2. Pay Your Taxes
An extension to file does not extend time to pay. Taxes are still due on or before the deadline, so make sure you pay the amount owed in a timely manner. If a taxpayer pays at least 90% of the tax due with the extension request, they may not face a penalty for failure-to-pay. However, they must pay the remaining balance by the extended due date, and they will owe interest on the tax paid after the April 17 deadline.

There are several ways to pay tax. For individuals, the IRS offers “IRS Direct pay,” which is a fast, easy and free option to pay directly from your checking or savings account. You can also request a payment plan using the “Online Payment Agreement” tool at IRS.gov. Another popular option is to mail your check with the extension request, in which case it is advisable to use certified mail with return receipt, so you have proof of timely mailing. Such proof is accepted by the IRS to demonstrate timely compliance.

3. No Penalties if There is Reasonable Cause
Sometimes there are situations that are beyond a taxpayer’s control which may affect the ability to timely file a tax return. In such an event, the taxpayer will not be subject to penalties for failure-to-file or failure-to-pay if they can show reasonable cause.

According to the IRS, the following are some of the examples of reasonable cause for not filing a tax return on time:

• Fire, casualty, natural disaster or other disturbances.
• Inability to obtain records.
• Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family.
• Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.
• Lack of funds is not a reasonable cause for failure-to-file your tax return. However, the reasons for lack of funds may meet reasonable cause criteria for failure-to-pay penalty waiver.

Reasonable cause is based on facts and circumstances. A taxpayer is responsible for providing documentation to demonstrate reasonable cause. Hospital records, court records or documentation of any casualties or other events is helpful when the IRS evaluates an explanation for failure-to-file a return or failure-to-pay taxes.

Forgetting to file a tax return or claiming forgetfulness or an oversight by another party is not in line with ordinary business care and prudence standard and so cannot be used as a basis for reasonable cause. It is taxpayer’s responsibility to timely file their tax return and make timely payments.

According to guidance provided by the IRS on its website and in IRS publications, the following factors are considered to evaluate conditions for reasonable cause:

• What happened and when did it happen?
• What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file or pay your taxes timely?
• How did the facts and circumstances affect your ability to file your return or pay your taxes or perform your other day-to-day responsibilities?
• Once the facts and circumstances changed, what actions did you take to file and pay your taxes?
• In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?

Consider the points above when you prepare documentation to support your position when explaining inability to comply timely.

Note that a successful demonstration of reasonable cause will waive penalties, but not any interest due to the IRS. Interest will be reduced or removed to the extent associated with a penalty charge that is reduced or removed, but not on the tax itself. If you continue to owe taxes, interest will accrue until you have fully paid your taxes.

In the US, the self-assessment system of tax liability and payment is based on the principle of voluntary compliance. This means taxpayers must make a good faith effort to meet tax compliance obligations. According to the IRS, penalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized.

The penalty for filing a frivolous tax return is $5,000. Do not be persuaded to take a frivolous tax position, or listen to frivolous arguments suggesting you do not have to not file a tax return or pay taxes. Every year the IRS rolls out its “Dirty Dozen” tax scams list which includes taxpayers using frivolous tax arguments to avoid paying taxes. Some of the most common frivolous tax arguments are also listed in its “The Truth about Frivolous Tax Arguments” document.

“Taxpayers should steer clear of tax-avoidance arguments and the unscrupulous promoters of such schemes,” said former IRS Commissioner John Koskinen. “Taxpayers tangled up in these scams end up paying back taxes and often stiff penalties as well.”

Vani Murthy, CPA, M.S. Tax, is a tax manager in the Chicago office of CBIZ MHM. She has 10 years of experience in business and individual tax matters, non-profits, international tax compliance and tax research.

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Written by: T. Steel Rose, CPA

Published: 26 March 2018

Coinbase, America’s largest platform exchanging bitcoin into U.S. dollars serving 5.9 million customers, has complied with a narrowed IRS summons for 14,355 account holders. The IRS is seeking specific information regarding accounts with at least $20,000 in any one transaction in any year from 2013 to 2015. Coinbase admitted that this request covered 8.9 million transactions and initially refused to comply with the narrowed summons.

Notice 2014-21 provides that virtual currencies are property for tax purposes. Capital gain or loss from property transactions, including from virtual currency, is reported on Form 8949, which is attached to Schedule D, Capital Gains and Losses.

In support of its belief that virtual currency gains have been widely underreported, the IRS stated that only between 800 and 900 people electronically filed a Form 8949, that included a property description that was “likely related to bitcoin” in each of the years 2013 through 2015.

District Court ruled the summons, as further narrowed by the court, serves the legitimate purpose of investigating account holders with Coinbase who may have failed to pay federal taxes on their virtual currency profits.

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Written by: Robert E. McKenzie, J.D.

Published: 26 March 2018

The IRS is testing expanded criteria for streamlined processing of taxpayer requests for installment agreements. The test was scheduled to run through September 30, 2017 but has now been extended a year by the IRS.

During this test, more taxpayers will qualify to have their installment agreement request processed in a streamlined manner. Based on test results, the expanded criteria for streamlined processing of installment agreement requests may be made permanent.

During the test, expanded criteria for streamlined processing will be applied to installment agreement requests submitted to SB/SE Campus Collection Operations. This includes the Automated Collection System (ACS). Expanded criteria will not be applied to installment agreement requests submitted to W&I Accounts Management, SB/SE Field Collection or through the Online Payment Agreement application.

One expanded criterion being tested immediately is this: Individual taxpayers with an assessed balance of tax, penalty and interest between $50,000 and $100,000 may experience accelerated processing of their installment agreement request. This will occur if the taxpayers' proposed monthly payment is the greater of their total assessed balance divided by 84 – or – the amount necessary to fully satisfy the liability by the Collection Statute Expiration Date.

For individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest of $50,000 or less.

The test criteria discussed above also applies to all out of business debts up to $25,000 and all out of business sole-proprietorship debts up to $50,000. For in-business taxpayers, test criteria apply to income tax only debts up to $25,000.

For individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest between $50,001 and $100,000.

The test criteria discussed above also applies to all out of business sole-proprietorship debts between $50,001 and  $100,000.

Requests to Modify or Terminate An Installment Agreement

After an installment agreement is approved, you may submit a request to modify or terminate an installment agreement. This request will not suspend the statute of limitations on collection. While the IRS considers your request to modify or terminate the installment agreement, you must comply with the existing agreement. An installment agreement may be terminated if you provide materially incomplete or inaccurate information in response to an IRS request for a financial update.