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Tax reform has dominated our national mindset lately. But, we’re still wrapping up the 2017 tax year, and few, if any, changes to tax codes are likely to take effect this year.

So, what can you do now  to minimize federal and state taxes on your upcoming 2017 return? Here are some savvy steps to take no later than Dec. 31 with tax reform in mind, from Eric and the National Association of Tax Professionals:

Personal taxes

• Income timing – Defer flexible income into 2018, if possible. Many taxpayers will benefit from lower tax brackets next year.
• Itemized deductions – Load up on itemized deductions, such as property taxes, charitable contributions and medical expenses. The standard deduction rises next year and only one in 10 taxpayers is expected to be filing a Schedule A (itemized deductions) in 2018.
• Accelerate any of your children’s unearned income into 2017. Kiddie tax rates are going up in 2018.
• Prepay investment expenses and tax preparation fees in 2017. They won’t be deductible in 2018.
• State income taxes – If you typically owe state taxes when filing your return, prepay an estimate of those taxes by Dec. 31. Make the same move if you owe back taxes to Minnesota or another state.
• Electric car – Thinking electric? Buy one now, because Uncle Sam’s generous tax credit expires at year-end 2017.
• Buy something big –Just from the standpoint of sales taxes. The itemized deduction for sales taxes disappears in 2018, and a 2017 purchase still will capture that tax break.
• Moving expenses – The deduction for job-related moving expenses goes away in 2018. Pay as many expenses as possible by Dec. 31.
• Unreimbursed business expenses –If you’re used to writing off work expenses that your employer won’t reimburse (e.g. mileage, certain types of dues or other trip expenses), prepare to lose that itemized deduction in 2018. It didn’t survive tax reform.

Business taxes

• Income timing – Same strategy as for individual taxpayers. Push business income out into 2018, when tax rates will be lower.
• Business losses – Recognize losses in 2017, if possible. They will be limited next year.
• Vehicles – Wait to buy a business vehicle until 2018. One reason: Depreciation on luxury autos rises substantially next year. BUT, if you fancy a new work truck and its GVWR is more than 6,000 lbs., heading to the dealership by Dec. 31 could be a good move to reduce 2017 income.
• Intellectual property – Sell any business processes or patents before the end of this year. They receive favorable, capital gains treatment for 2017, but will be taxed as ordinary income in 2018.

As always, taxes are highly personal, so if you have questions, contact Eric for more specific guidance!

On a separate year-end note, here’s a warning/reminder from the Internal Revenue Service about Individual Taxpayer Identification Numbers. If you use this type of account instead of a Social Security number and your number is expiring, act quickly. The IRS says failing to renew by year-end (Dec. 31) could delay the turnaround time for your 2018 tax return.

You should have received an IRS letter in the summer if your ITIN is expiring. More than 1 million taxpayers did. If you haven’t used your number on a federal tax return in the last three years, the ITIN automatically has expired. There also are some series of numbers that no longer will be good for 2018.

The IRS provides details online. Start at https://www.irs.gov/newsroom/get-ready-for-taxes-taxpayers-with-expiring-itins-should-submit-renewal-applications-by-dec-31

Once again, the Internal Revenue Service is warning the taxpaying public about a dangerous deception by cyber scammers. This one is particularly sophisticated, but it also is simple to foil.

The Web criminals have been sending fake tax forms about life insurance using the names of tax preparers. The objective? To reach into the clients’ life insurance policies or annuities and steal money. With enough information, a nefarious somebody could take out loans or even clean out the value of an annuity.

The IRS alert has a few tip-offs to watch for:
• The subject line of the scam emails tends to emphasize “urgent information.”
• This text has been used: “Kindly fill the form attached for your Life insurance or Annuity contract details and fax back to us for processing in order to avoid multiple tax bill.”
• Poor grammar in the message also is a warning sign.
• Of course, a slightly altered email address is a big flag in these types of phishing attacks. Check before clicking!

The defense is simple. Don’t click; just delete. Sending back the fake tax form online gives the crooks information they can use to steal from a life insurance or annuity account.

The IRS didn’t say if the scam is widespread yet. But it’s a masquerade that involves two deceptions. First, the crooks fool a tax preparer and grab email addresses from his/her computer. (The thieves have been doing that by posing as a “cloud” storage site, the IRS says.) Then, they use the tax preparer’s name to send clients the bogus tax form.

Eric didn’t fall for this one. Here are his working precautions:
• Never click on an emailed link from a client, because it may not be real.
• Do not open .pdf attachments from clients unless a personal message comes with the email and documents have been discussed verbally in advance.
• Always use the EricJohn Ltd. portal for sending and receiving documents. (Clients have password-protected access.)

At the same time, Eric says it’s worthwhile to remind all his clients to be “super-careful with emails, even from me.”

A general caution. You should not be hearing from the IRS online or by phone without receiving written notice ahead of time. In the agency’s words: “The IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.”

Find more information at the IRS “Report Phishing and Online Scam page,” which is: https://www.irs.gov/privacy-disclosure/report-phishing

Still have a question about whether a tax-related contact is legit? Contact Eric, owner of EricJohn Ltd. tax service, at his email, [email protected] (P.S. Don’t send attachments at first contact. Eric plays it safe!)

The anticipation about tax reform now is being satisfied. We’ve got details.
Both the House of Representatives and the Senate versions of federal tax reform are promising big cuts in taxes, especially for the middle class. Both houses of Congress named their bills the “Tax Cuts & Jobs Act.” Corporations and small business also are in line for benefits.

It’s not a done deal yet. Although the House of Representatives passed its tax fix on Thursday (11/16), the full Senate still must vote on it, probably after Thanksgiving. But we finally know what tax-slashing is likely.

What’s in these bills for you?

Here’s a briefing on some significant changes to the tax codes. It skims the surface of this major overhaul, of course. By the way, these revisions will not affect 2017 tax returns.

•Income tax brackets. All are for taxpayers who are married filing joint. With one exception, the bills set figures for single taxpayers at half of the joint amount.
HOUSE — four brackets (married filing joint)
 They are: 12%, starting at $0; 25%, starting at $90,000; 35%, starting at $260,000 and 39.6%, over $1 million.
SENATE – seven brackets (married filing joint)
 They are: 10%, starting at $0; 25% starting at $19,050; 22%, starting at $77,400; 25%, starting at$140,000; 32%, starting at $320,000; 35%, starting at $400,000; and 38.5%, starting at $1 million.

• Standard deduction –Both House and Senate versions almost double the standard deduction to $24,000 for married filing joint (up from $12,000) and half that, or $12,000, for individuals.

• Child tax credit – It is boosted in both bills to $1,650 from $1,000. The House version recasts it as a new Family Credit and adds another credit of $300 for each parent and for dependents who are not children “to help all families with their everyday expenses,” a summary says.

• Charitable contributions – Both House and Senate keep the itemized deduction for gift-giving to charities and other non-profits.

• Home mortgage interest – Again, lawmakers in both houses are preserving the itemized deduction for mortgage interest on existing home loans. However, the House caps the deduction for newly purchased homes at $500,000 and the Senate ends it at $1 million. That difference will have to be ironed out.

• The deduction for state and local property taxes is at risk. The House is willing to allow it up to $10,000; the Senate bill erases it entirely.

• Your IRA, 401(k)s and other retirement plans are safe in both bills. The Senate proposal would repeal conversions between traditional and Roth IRAs, though.

• Both the House and Senate proposals also abolish the complicated alternative minimum tax. (There will be no tears from taxpayers or tax preparers over that change!)

Let’s just mention three important rewrites for businesses:

• Business tax rates — Corporate tax rate is reduced to 20 percent from the current 35 percent, the largest drop in U.S. tax history. The federal tax on small business income also is cut to no more than 25 percent, but there may be differences and lower rates for “pass-through” entities.

• Both versions allow businesses to write off immediately the full costs of new equipment used in their operations.

• The research and development tax credit is preserved in both bills.

To place the reforms into the tax code, the Senate must pass its version. Then, it and the House version must be reconciled to become one bill. Finally, President Donald Trump must sign it into law.

Feel free to contact EricJohn Ltd. for tax planning ideas in these final two months of 2017.

The Internal Revenue Service is making it easier for some charitable taxpayers and their employers to donate as the nation rushes relief to areas ravaged by Hurricane Harvey. The IRS just announced it will not tax proceeds from “leave-based donation programs” that will benefit Hurricane Harvey victims.

Some, but not all, employers allow their workers to trade in their vacation, personal leave or sick time for cash payments sent to charities.  Here’s how the programs work.  The employee authorizes the exchange. Then, instead of paying him/her for leave time, the employer sends the cash donation directly to a charity or relief effort.

The IRS now says those charitable gifts for Hurricane Harvey relief will not be included in the employee’s wages. They’re tax-free.  Of course, that also means the employee also can’t claim a charitable deduction for the donation on his/her personal tax return.

Employers offering the leave-based plans also receive some tax advantage. The IRS allows them to deduct those donated dollars as business expenses.

The special tax treatment will continue through this year and calendar year 2018, the agency says.

The IRS has offered similar relief before, not only for hurricanes (Matthew in 2016, Sandy in 2012, Katrina in 2005), but also for other disasters, such as the Ebola medical emergency in West Africa in 2014.

If you’re inclined to help that way, check to see if your employer offers this type of charitable giving.

If you want the legalese about leave-based donation payments related to Hurricane Harvey, see IRS Notice 2017-48. More information about Harvey and related issues from the IRS is available at a special Web page:  https://www.irs.gov/newsroom/help-for-victims-of-hurricane-harvey.

Of course, feel free to check in with us at EricJohn Ltd. for tax advice on “leave-based” and other types of donations.

Last call!

Tuesday, Aug. 15, is the last chance for Minnesota homeowners and renters to grab a refund of some property taxes for 2015. However, while Aug. 15 is their original due date, state residents who paid the taxes in 2016 can relax. Although Aug. 15 is the original due date, they still have another year—until Aug. 15, 2018 – to make a claim.

The refund for homeowners formally is called the “Homestead Credit Refund”; for people who rent, it’s simply the “Renter Property Tax Refund.”  Minnesota Form M1PR covers both types of refunds. Also possible is a “special credit,” which applies to homeowners who have seen sudden increases (more than 12%) in their property taxes.

\Property owners and renters must qualify for the tax break based on income and on the amount of taxes they paid.  Not everyone qualifies, but the refund can be rewarding for those who do. The average tax break last year figured to $840 for homeowners and $635 for renters, Minnesota Revenue said last week.

Homeowners must have their Statement of Property Taxes Payable, which is issued by their county, and renters must have their Certificate of Rent Paid, which comes from their landlords. (Check instructions for details about those proofs.)

Form M1PR can be filed electronically, as described in a video from Minnesota Revenue, https://www.youtube.com/watch?v=fU9rde_47WA, or on the agency’s Web site.

The state tax agency offers a short video online about the property tax refunds for renters. See https://www.youtube.com/watch?v=Jcrzs-L6HtQ.

Minnesota Revenue also is advising that refunds may be slower in coming this year than in the past because of precautions to prevent tax frauds such as identity theft.

While the 2015 deadline is all but gone, EricJohn Ltd. can help homeowners or renters with advice or a complete filing of Form M1PR for 2016.

The end of the summer vacation break is in sight, and so are back-to-school sales. Minnesota parents will want to grab a different kind of break – a tax break — as they load up on school supplies for their young students.

Be sure to collect and save receipts for school-related purchases at the check-out lane. They probably will lower your state taxes on 2017 returns.

Expenses paid for pencils, pens, paper and notebooks, educational computer software, required gym clothes – almost anything used by your children in elementary or high school for education during the school day – at least can at least be subtracted from income.

Families with limited incomes often can qualify for a tax credit, which reduces taxes directly. In fact, they can claim a refund from the credit even if they normally would not owe taxes or have to file a return.  (One technical note. Tax returns with status “married filing separately” are not eligible.)

It’s a popular program. Minnesota Revenue says 199,000 families took advantage of the K-12 subtraction last year. Another 43,000 claimed the tax credit at an average savings of $242.

The tax break actually extends well beyond those shopping trip expenses. Fees for all-day kindergarten, private school tuition, individualized music lessons away from school, tutoring by qualified teachers (outside your family), summer school expenses and driver’s education (conducted within the normal school day only) also can qualify.

Many costs of a home computers are eligible, provided the computer is not used for business. The cap generally is $200 per family, but it could range up to $400 in specific circumstances.

By the way, home schoolers also can qualify for most of the expenses. But note that textbooks and other materials must be “non-religious” to qualify.

The tax break generally ends with the school day. Fees for extracurricular activities are excluded. For example, don’t try to claim the costs of band uniforms or sports gear, even if the teams are fielded by the school.

Want more details?  See Minnesota Fact Sheet 8 about the K-12 Education Subtraction and Credit, which is available online from Minnesota Revenue’s Web site, www.revenue.state.mn.us Likewise, Fact Sheet 8a goes into more detail about the education tax breaks for home-schooled students. Or, maybe you’d like to see videos. Minnesota Revenue offers a short video about both programs at https://www.youtube.com/watch?v=IN7v-cxdPkw. One specifically about the education tax credit, which has income limits, is at https://www.youtube.com/watch?v=lXpSNoLjluc&feature=youtu.be.

Finally, if you’re visiting the upcoming Minnesota State Fair, stop at the Minnesota Revenue booth in the Education Building. Agency reps are giving away free envelopes to hold those school supply receipts for a few months until they’re needed at tax time.

We at EricJohn Ltd. suggest another handy way to track those education expenses. Snap photos of receipts with a cell phone and store them in an electronic folder for easy reference at tax time.

 

Every once in a while, Minnesota’s tax system moves to catch up to the feds’. It now appears the latest catch-up is going to create refunds from 2015 returns for some state taxpayers.  Just as important, Minnesota Revenue promises NO additional taxes from the changes.

Here’s what has happened recently. In January, the Minnesota Legislature made its latest catch-up covering two tax years, 2015 and 2016. State authorities actually were able to build the changes into the latest tax forms, so 2016 returns were not affected. But the state does owe some taxpayers refunds from 2015 returns.

In general:

• If your 2015 Minnesota return included Schedule M1NC (called Federal Adjustments), you could well have a refund coming.
• If your 2015 return did not include a Schedule M1NC, you are not affected.
• Taxpayers who bought an out-of-box software package for their 2016 returns should check on any updates from the software company.

Minnesota Revenue recently said it began reviewing all 2015 returns with those “federal conformity adjustments” in mind. State taxpayers generally won’t have to take any action. In fact, Minnesota Revenue is so obliging that it will figure in any new deductions or exclusions automatically.

You’ll know if you have money coming. The tax agency will send an official letter and a refund. Some taxpayers might get a letter asking for more information on the way to a refund.

The agency says taxpayers will be required to amend their 2015 returns to get a refund only if Minnesota Revenue cannot complete the changes itself. If you need to amend, you’ll get a notice, the taxing agency announced.

Here’s the big picture on conformity. Minnesota’s policy generally is to “conform” – or coordinate – its income tax system with the federal tax codes. That’s why the Line 1 on your state tax return (Form M1) is “taxable income” from your federal return. Minnesota Revenue jumps off from that starting point to calculate your Minnesota income and then your state taxes.  Periodically, the state Legislature updates state tax codes to reflect the federal ingredients in adjusted gross income, which leads to taxable income.

As you know from our Web site, EricJohn Ltd. can help with a closer look at your taxes from both current and prior years.

http://www.revenue.state.mn.us/individuals/individ_income/Pages/Federal-Conformity_15-16.aspx

 

Who’s agitating for the taxpayer inside the Internal Revenue Service?  Meet Nina Olson, the National Taxpayer Advocate. While she works within the IRS, she reports by law only to Congress “with no prior review or comment from the (IRS) Commissioner . . . (or) Secretary of the Treasury.”

On June 28, Olson sent her mid-year 2017 report about the tax-collecting agency to Congress. It gives her view of the recent 2017 filing season for taxes and singles out issues for her Taxpayer Advocate Service to take on during the coming year.  We can’t cover it all, but here are some highlights of the 2018 Objectives Report to Congress:

2017 Filing Season

• Most taxpayers who filed returns without contacting IRS had no problems. But results were “mixed” for taxpayers who had to phone or write in for help.
• IRS answered 79 percent of calls for assistance filing returns. Taxpayers typically spent 6.5 minutes on hold, an improvement from 11.1 minutes the prior year. (IRS receives more than 100 million toll-free calls.) Olson found that increased performance praiseworthy.
• But IRS answered only 40 percent of calls to the compliance lines, which arrange installment payments, etc. Taxpayers who did get through had to wait a “staggering” 47 minutes, the report said.
• IRS processed 130 million returns; 90 percent of them were filed electronically. Seventy-five percent yielded refunds, with the average at $2,763.
• Olson criticized a new IRS requirement for appointments at its 376 Taxpayer Assistance Centers. The centers used to be open for “walk-in” clients but now are “appointment only.”

Selected Priority Issues

• Scrounging up delinquent taxes: The IRS began using private agencies to collect overdue taxes beginning this spring. After reviewing collections so far, Olson’s office wants the IRS to stop referring low- income taxpayers receiving Social Security to those private collection agencies instead of working with the accounts through more lenient IRS channels.
• Passport denials: By law, the IRS must certify that passport applicants don’t owe substantial amounts of delinquent taxes to the government. The Taxpayer Advocate wants the IRS to send advance notice to applicants if the agency intends to reject the certification, which effectively could deny a passport.  That’s not done now.
• Advantages and disadvantages of IRS emphasis on online taxpayer accounts
• IRS policies regarding tax levies made on retirement accounts.
• Taxpayer problems in reporting insurance under requirements of the Affordable Care Act. The IRS has “made progress” but the ACA and its premium tax credits remain troublesome for Olson.

Last year, the National Taxpayer Advocate made 93 recommendations in its year-end report. The IRS agreed to 35 of them, or 38 percent, according to an agency release.

We know. Those fat file folders of tax forms are stuffed into your cabinets– or cluttering up your hard drive — long after April’s tax payments have gone to various governments. That’s actually appropriate, to some extent. But sooner or later, many taxpayers are left wondering what to keep and what to toss, what to save and what to delete. When can we clean out some of this paperwork?

The short answer is: Not for at least three years after the due date, which typically is April 15. The Internal Revenue Service advises holding on to the tax forms plus any documents supporting them (W-2 slips, dividend statements, receipts for stock sales, etc.) that long. The federal agency can collect more tax and, taxpayers can amend their returns during that period.

But, as the Kiplinger Tax Letter suggests, don’t just send everything to the shredder after three years. There are important exceptions. The IRS offers these sweeping guidelines:
• Retain those returns for six years if you did not report some income and the amount totals more than 25 percent of the gross income that was declared.
• Hang on to records for seven years when claiming certain losses, such as worthless securities or bad debts.
• There is no limit for returns that were not filed at all or that involve fraud.
• Employers should keep employment and payroll tax records for at least four years after the due date for taxes.
• Keep health insurance coverages for all family members. They now are part of tax returns.

Some types of records also should linger for as long as decades because they verify important financial events. Real estate records are a good example. Homeowners will have to figure the original value plus costs of other additions (adjusted basis) when they sell their houses. Keep the records for at least three years after selling the property.

Ditto for records of other types of property, such as stock investments and traditional Individual Retirement Arrangements (IRAs), which both can involve tax liability. Keep details of inheritances of property to report in the tax year when they are sold; they are valued when received on the date of death of the donor.

Whether or not it’s required, filing away some tax records helps to paint a picture of your financial life, and that recordkeeping can be valuable by itself.

If you’re a client, EricJohn Ltd. also has kept your financial records in secure form electronically since 2009, owner Eric Buechler says. For more detailed information about recordkeeping, contact EricJohn Ltd. or check into IRS Publication 552 (Recordkeeping for Individuals).