Category: Personal Taxes

IRS confirmed it will process tax returns beginning Jan. 28

Despite the ongoing government shutdown, Office of Management and Budget Director Russell Vought issued a statement yesterday that tax refunds will go out as scheduled, unlike in previous shutdowns.  The Internal Revenue Service has given the green light to processing returns as it set the date to being accepting returns beginning Jan 28th.

IRS Commissioner Chuck Rettig said on Monday, “we are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period.” The IRS doesn’t normally issue refunds during a shutdown, however Rettig said the IRS has “consistently been of the view that it has the authority to pay refunds despite a lapse in annual appropriations.”

The IRS closure during the partial government shutdown couldn’t have come at worse time for taxpayers looking for answers to the changes brought about by the Tax Cuts and Jobs Act of 2017 signed by President Donald Trump on Dec. 20, 2017.  With almost 90% of the IRS workforce on furlough it’s unlikely that many taxpayers will be able to reach the IRS for help during the ongoing shutdown.

The filing deadline to submit 2018 tax returns is Monday, April 15 for most taxpayers.  Taxpayers in in Maine and Massachusetts are granted a couple of extra days due to the Patriots’ Day holiday on April 15, likewise those residing in the District of Columbia where Emancipation Day holiday is being observed on April 16 also do not have to file until April 17th.

Significant changes to Personal Exemptions & Standard Deduction

The Tax Cuts and Jobs Act (TCJA) passed late 2017 has brought with it some significant changes to both personal exemptions and standard deduction for tax years 2018 through 2025 which are outlined below.

No More Personal Exemptions

By and large personal tax exemptions and the standard deduction have looked the same for quite some time.  However, with the passage of the Tax Cuts and Jobs Act (TCJA) many individual taxpayers may find themselves confused by the changes.

For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. If they choose not to itemize, they can take a standard deduction based on their filing status: $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

For 2018 through 2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction amounts to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. The standard deduction amounts will be adjusted for inflation beginning in 2019.

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions and possibly even provide some additional tax savings. But for those with many dependents or who are used to itemizing deductions, these changes could result in a higher tax bill — depending in part on the extent to which they can benefit from family tax credits.

IRS Tax Penalties

Avoid these common types of IRS Penalties

Filing Extensions

One of the most common errors that taxpayers make every year is assuming that filing for an extension buys them more time to file their return and paying any taxes owed.  Filing for extensions are easy whether you are missing crucial forms (e.g. 1099’s or K1’s) or it’s due to simple procrastination and you want to buy more time to file, there is no explanation required.  What is required however, is that taxpayers remit with their extension an approximate amount they will owe, failure to do so will result in taxpayers being subject to “penalties and interest“!

 

Estimated Tax Miscalculation

Quarterly tax payments are due four times a year, failure to make these payments could result in an “estimated tax penalty”.  This is a fairly common penalty as the IRS assessed this penalty to more than 10 million taxpayers in 2017.  Although it is most common among people who are self-employed or retirees who have investments, taxpayers who don’t withhold enough taxes from their paycheck could also be subject to an estimated tax penalty.  On the bright side, the penalty is one of the more reasonable ones assessed by the IRS as it generally equates to interest owed on a taxpayers underpaid funds (as of April 2018 the IRS interest rate is 5%).

Failure-to-file & failure-to-pay

The failure-to-file penalty is generally more than the failure-to-pay penalty.   The IRS may remove or abate these penalties if you can show that you had reasonable cause for not filing or paying your taxes by the deadline (e.g. casualty, fire or other interventions).  If the taxpayer cannot provide an acceptable reason for filing or paying late, they may be able to apply for a first-time penalty abatement (FTA) waiver. To qualify for this type of relief, the following requirements must be met 1) received no penalties (other than estimated tax penalties) for the three tax years preceding the tax year in which you received a penalty, 2) filed all required returns or filed a valid extension of time to file, and 3) paid, or arranged to pay, any tax due.  Taxpayers can also reduce the failure-to-pay penalty by setting up a payment plan with the IRS commonly known as an “installment agreement”, these payment plans can cut a taxpayers penalties by as much as 50%.  There are many types of installment plans offered by the IRS, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you determine which plan is most suitable for you.

Tax Filing Inaccuracy

Although some tax filing inaccuracies are forgivable (e.g. incorrect birth date or address entry), others like substantial underpayment or negligently prepared returns will not be treated so favorably and will in most cases trigger penalties and interest due.  If the IRS determines that your tax return was filed inaccurately due to negligence (e.g. inadequate record keeping, or other gross understatement of taxes due) they can assess penalty for negligence.  If the IRS deems that the inaccuracies or substantial underpayment are a result of an intentional attempt at fraud or evasion then civil and or criminal penalties can be assessed.

 

Regardless for the reason of the inaccuracies on the tax return the IRS will almost always assess interest penalties (these are in addition to any other penalty assessed) on the balance of taxes owed, and unlike other penalties that have limits, there are no maximum amount of interest (compounds daily) that can assessed!  If you receive a notice from the IRS regarding a penalty or interest being assessed against you and are unsure how to proceed or simply prefer to have more experienced person address the IRS on your behalf, contact the professionals at TaxPM™ today!

Understanding The New Tax Code: Home Interest Deduction

2018 Home Mortgage Interest Deduction

President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA) on December 22, 2017.  With its passage many important changes and revisions were made.  Once such item that has undergone some important changes is the,”home mortgage interest deduction”.   The IRS has long incentivized home ownership by offering taxpayers a tax deduction for mortgage interest.  This long-standing tax perk has fueled one of the cornerstones of the “American Dream”, home ownership!

Under the Tax Reform Act of 1986, home mortgage interest was allowed only up to $1,000,000 of debt principal that was used to acquire, build, or substantially improve a principal residence or a second home; and the debt was secured by that residence respectively.  However, under the TCJA, the limits on itemized mortgage interest deduction have been reduced to $750,000.  Notably, existing home owners are grandfathered in under the older $1,000,000 limit.  Furthermore, there is one important tidbit to consider, and that is the ever confusing IRS terminology, in this particular case – “acquisition indebtedness”.   Taxpayers are responsible for determining how much of their mortgage interest is or isn’t deductible based on this IRS jargon if you will, of acquisition indebtedness.  And of course, to add anxiety and confusion to the taxpayer the IRS expects the taxpayer to keep extensive records on how the mortgage proceeds were actually used, irregardless of how the loan is structured or what the lender calls it.

Further complicating the matter, the passing of the TCJA has completely eliminated the ability to deduct interest on home equity indebtedness, hence taxpayers need to inform themselves as to what exactly the IRS determines are these types of loans by their standard.  This is effective for 2018 and beyond there are no grandfathering provisions for existing home equity debt.

Don’t be to eager to deduct the mortgage interest (if any) on your second home, especially if you rent out the second home.  To qualify for this deduction there are a variety of rules and many times it is best to consult a tax professional like TaxPM who can determine how much(if any) of the mortgage interest can be deducted for a second home, and if it in fact falls into the “home mortgage interest deduction” or otherwise needs to be treated differently per the tax code.  Also be aware that the rules and difficulty to ascertain the deduction change substantially if you rent the second home for more than 14 days.

In closing, one would hope that it would be as simple as receiving a mortgage interest statement and reporting that number directly on the tax return – well it’s not that simple. Although there are many potential tax breaks with owning a home, like, home mortgage interest deduction, taxpayers need to pay close attention to the rules and changes that were adopted by the new tax code with the passing of the Tax Cuts and Jobs Act (TCJA).