Harless Tax Blog
President Donald Trump is pitching the Republican tax-cut plan as aimed primarily at helping middle-class Americans, but the biggest beneficiaries of cuts in the individual tax rates are in the wealthiest income brackets.
A study from Congress’s own think tank provides some of the most recent evidence of this. The nonpartisan Congressional Research Service concluded that under the Senate plan, Americans making between $500,000 and $1 million a year would see the biggest percentage increases in their after-tax income.
By contrast, the CRS found that taxpayers making less than $30,000 would see their after-tax income decline as soon as 2021.
Such analyses haven’t altered the Republican campaign to promote the tax cuts.
“Our focus is on helping the folks who work in the mailrooms and machine shops of America, the plumbers and the carpenters, the cops and the teachers, the truck drivers and the pipe fitters,” Trump says in excerpts of a speech he’s set to deliver Wednesday afternoon in Missouri. “It is not enough for the middle class to keep getting by—we want them to start getting ahead.”
Republican senators, who are working toward a vote this week, argue that their bill would help the middle class, both through reductions to their tax rates and because cuts to corporate rates would spark economic growth that will boost incomes in the coming years.
“This is not a bill that’s primarily designed to benefit the wealthy and the large businesses,” John Cornyn, the Senate’s No. 2 Republican, said on Fox News Tuesday morning. “This is designed to help middle-income taxpayers get the economy growing again and bring down the tax burden across all tax brackets.”
GOP senators have largely downplayed many of the studies from outside analysts of their bill’s effects, along with those from Congress’s own experts.
For example, the CRS attributed the anticipated decline in income for Americans making less than $30,000 in part to the measure’s repeal of Obamacare’s requirement to buy health insurance or pay a federal penalty.
Congressional forecasters say millions of people will forgo insurance coverage if the mandate is repealed, meaning they’d no longer get tax credits to help cover their insurance premiums. But Republicans have rejected this argument, saying the change will protect Americans from having to purchase expensive insurance or pay a penalty.
Senate Finance Chairman Orrin Hatch said Monday he wasn’t confident in the accuracy of a report by the Congressional Budget Office, which is the official scorekeeper for the fiscal impact of legislation.
The CBO found that the Senate bill as written would provide less benefit from federal spending to the poorest taxpayers—those earning less than $30,000 a year—as early as 2019. By 2021, all income groups making less than $40,000 a year would be net losers, according to Sunday’s CBO report. It also shows people from $50,000 to $75,000 facing additional costs by 2027.
“I don’t think they’re right,” Hatch said of the CBO’s findings in a report published Sunday.
The CBO measured how much the federal government would save in spending or lose in revenue to different income groups, while the CRS study showed the percent change in after-tax income.
Hatch requested a follow-up CBO report that excludes the impact of removing the penalty to enforce the individual mandate. That report, published Monday, also found that filers bringing in less than $75,000 would see less tax benefits, but not until 2027.
The difference is due to less government spending on premium tax credits, Medicaid, Medicare, cost-sharing reduction payments and other health programs that largely benefit the poor, according to the CBO report.
Analyses of the House-passed tax bill, H.R. 1, have similar findings about which income groups benefit the most. The CRS found that taxpayers with incomes of more than $1 million “tend to experience the greatest percentage increases in after-tax income” under that measure, while those who make less than $40,000 could see their income fall in 2023.
Democrats have criticized the Republican tax overhaul for slashing rates for corporations and the highest earners, while adding more than $1 trillion to the deficit and erasing breaks for some middle-income people.
To fit Senate budget rules that allow Republicans to pass a tax bill with 50 votes, the Senate bill sets the cuts to individual tax rates to expire in 2026. The CRS and the CBO analyze the bill as written, although Republicans insist that Congress would extend those cuts.
Senator Pat Toomey of Pennsylvania said it’s possible that some Democrats will still get on board with their bill.
“It lowers taxes for middle-income families and low-income families,” Toomey said in an interview on Bloomberg TV. “It gives the people they represent a pay raise by virtue of lowering the amount of money they have to send to Uncle Sam.”
That may be true for the first year that the Senate bill would be law, according to the CRS report, but that benefit evaporates by 2021 for households earning $10,000 to $30,000. A statement from Toomey’s press office said the study from the JCT study that excludes the impact of repealing the individual mandate should be the reference, rather than the CRS report. That JCT study also shows taxpayers earning less than $75,000 owing more to the federal government by 2027 under the Senate proposal.
In the House bill, the CRS report identifies two factors that would leave middle class families with a higher tax burden: an expiring family tax credit and the method by which income brackets are adjusted for inflation.
House Speaker Paul Ryan said the family tax credit of $300 for each parent and some dependents won’t end up expiring, even though that’s how the House bill is written, because future lawmakers will be pressured to extend it.
The Internal Revenue Service today warned people to avoid a new phishing scheme that impersonates the IRS and the FBI as part of a ransomware scam to take computer data hostage.
The scam email uses the emblems of both the IRS and the Federal Bureau of Investigation. It tries to entice users to select a “here” link to download a fake FBI questionnaire. Instead, the link downloads a certain type of malware called ransomware that prevents users from accessing data stored on their device unless they pay money to the scammers.
“This is a new twist on an old scheme,” said IRS Commissioner John Koskinen. “People should stay vigilant against email scams that try to impersonate the IRS and other agencies that try to lure you into clicking a link or opening an attachment. People with a tax issue won’t get their first contact from the IRS with a threatening email or phone call."
The IRS, state tax agencies and tax industries – working in partnership as the Security Summit – currently are conducting an awareness campaign called Don’t Take the Bait, that includes warning tax professionals about the various types of phishing scams, including ransomware. The IRS highlighted this issue in an Aug. 1 news release IR-2017-125 Don’t Take the Bait, Step 4: Defend Against Ransomware.
Victims should not pay a ransom. Paying it further encourages the criminals, and frequently the scammers won’t provide the decryption key even after a ransom is paid.
Victims should immediately report any ransomware attempt or attack to the FBI at the Internet Crime Complaint Center, www.IC3.gov. Forward any IRS-themed scams to firstname.lastname@example.org.
The IRS does not use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. For more information, visit the “Tax Scams and Consumer Alerts” page on IRS.gov. Additional information about tax scams is available on IRS social media sites, including YouTube videos.
If you are a tax professional and registered e-Services user who disclosed any credential information, contact the e-Services Help Desk to reset your e-Services password. If you disclosed information and taxpayer data was stolen, contact your local stakeholder liaison.
Every taxpayer has a set of fundamental rights and the IRS has an obligation to protect them. The “Taxpayer Bill of Rights” groups the taxpayer rights found in the tax code into 10 categories. Know these rights when interacting with the IRS. A good way to learn about them is by reading Publication 1, Your Rights as a Taxpayer.
Below are the descriptions of each right, as listed in Publication 1:
- The Right to Be Informed. Taxpayers have the right to know what to do in order to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures on all tax forms, instructions, publications, notices and correspondence. They have the right to know about IRS decisions affecting their accounts and receive clear explanations of the outcomes.
- The Right to Quality Service. Taxpayers have the right to receive prompt, courteous and professional assistance in their interactions with the IRS. They also have the right to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.
- The Right to Pay No More Than the Correct Amount of Tax. Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties and to have the IRS apply all tax payments properly.
- The Right to Challenge the IRS’s Position and Be Heard. Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions. They also have the right to expect the IRS to consider their timely objections promptly and fairly and to receive a response if the IRS does not agree with their position.
- The Right to Appeal an IRS Decision in an Independent Forum. Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties and have the right to receive a written response regarding the Office of Appeals’ a decision. Taxpayers generally have the right to take their cases to court.
- The Right to Finality. Taxpayers have the right to know the maximum amount of time they have to challenge an IRS position as well as the amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.
- The Right to Privacy. Taxpayers have the right to expect that any IRS inquiry, audit or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing
- The Right to Confidentiality.Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.
- The Right to Retain Representation.Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.
- The Right to a Fair and Just Tax System. Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.
Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.
Taxpayers may be able to deduct certain expenses of moving to a new home because they started or changed job locations. Use Form 3903, Moving Expenses, to claim the moving expense deduction when filing a federal tax return.
Home means the taxpayer’s main home. It does not include a seasonal home or other homes owned or kept up by the taxpayer or family members. Eligible taxpayers can deduct the reasonable expenses of moving household goods and personal effects and of traveling from the former home to the new home.
Reasonable expenses may include the cost of lodging while traveling to the new home. The unreimbursed cost of packing, shipping, storing and insuring household goods in transit may also be deductible.
Who Can Deduct Moving Expenses?
- The move must closely relate to the start of work. Generally, taxpayers can consider moving expenses within one year of the date they start work at a new job location.
- The distance test. A new main job location must be at least 50 miles farther from the employee’s former home than the previous job location. For example, if the old job was three miles from the old home, the new job must be at least 53 miles from the old home. A first job must be at least 50 miles from the employee’s former home.
- The time test. After the move, the employee must work full-time at the new job for at least 39 weeks in the first year. Those self-employed must work full-time at least 78 weeks during the first two years at the new job site.
Different rules may apply for members of the Armed Forces or a retiree or survivor moving to the United States.
Here are a few more moving expense tips from the IRS:
- Reimbursed expenses. If an employer reimburses the employee for the cost of a move, that payment may need to be included as income. The employee would report any taxable amount on their tax return in the year of the payment.
- Nondeductible expenses. Any part of the purchase price of a new home, the cost of selling a home, the cost of entering into or breaking a lease, meals while in transit, car tags and driver’s license costs are some of the items not deductible.
- Recordkeeping. It is important that taxpayers maintain an accurate record of expenses paid to move. Save items such as receipts, bills, canceled checks, credit card statements, and mileage logs. Also, taxpayers should save statements of reimbursement from their employer.
- Address Change. After any move, update the address with the IRS and the U.S. Post Office. To notify the IRS file Form 8822, Change of Address.
Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.
Accounting Services | Port St. Lucie
During the summer, some taxpayers may travel because of their involvement with a qualified charity. These traveling taxpayers may be able to lower their taxes.
Here are some tax tips for taxpayers to use when deducting charity-related travel expenses:
Qualified Charities. For a taxpayer to deduct costs, they must volunteer for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified, and do not need to apply to the IRS. A taxpayer should ask the group about its status before they donate. Taxpayers can also use the Select Check tool on IRS.gov to check a group’s status.
Out-of-Pocket Expenses. A taxpayer may be able to deduct some of their costs including travel. These out-of-pocket expenses must be necessary while the taxpayer is away from home. All costs must be:
- Directly connected with the services,
- Expenses the taxpayer had only because of the services the taxpayer gave, and
- Not personal, living or family expenses.
Genuine and Substantial Duty. The charity work the taxpayer is involved with has to be real and substantial throughout the trip. The taxpayer can’t deduct expenses if they only have nominal duties or do not have any duties for significant parts of the trip.
Value of Time or Service. A taxpayer can’t deduct the value of their time or services that they give to charity. This includes income lost while the taxpayer serves as an unpaid volunteer for a qualified charity.
Travel Expenses a Taxpayer Can Deduct. The types of expenses a taxpayer may be able to deduct include:
- Air, rail and bus transportation,
- Car expenses,
- Lodging costs,
- Cost of meals, and
- Taxi or other transportation costs between the airport or station and their hotel.
Travel Expenses a Taxpayer Can’t Deduct. Some types of travel do not qualify for a tax deduction. For example, a taxpayer can’t deduct their costs if a significant part of the trip involves recreation or vacation.
Family Office | South Florida
WASHINGTON — The Internal Revenue Service, state tax agencies and the tax industry today warned tax professionals that ransomware attacks are on the rise worldwide as bad actors here and abroad infiltrate computer systems and hold sensitive data hostage.
The IRS is aware of a handful of tax practitioners who have been victimized by ransomware attacks. The Federal Bureau of Investigation recently cautioned that ransomware attacks are a growing and evolving crime threatening the private and public sectors as well as individuals.
The “Don’t Take the Bait” campaign, a 10-week security awareness campaign aimed at tax professionals, hopes to increase awareness about these attacks. The IRS, state tax agencies and the tax industry, working together as the Security Summit, urge practitioners to learn to protect themselves. This is part of the ongoing Protect Your Clients; Protect Yourself effort.
“Tax professionals face an array of security issues that could threaten their clients and their business,” IRS Commissioner John Koskinen said. “We urge people to take the time to understand these threats and take the steps to protect themselves. Don’t just assume your computers and systems are safe.”
Ransomware is a type of malware that infects computers, networks and servers and encrypts (locks) data. Cybercriminals then demand a ransom to release the data. Users generally are unaware that malware has infected their systems until they receive the ransom request.
The 2017 Phishing Trends and Intelligence Report issued annually by Phishlabs named ransomware one of two transformative events of 2016 and called its rapid rise a public epidemic.
In May 2017, a ransomware attack dubbed “WannaCry” targeted users who failed to install a critical update to their Microsoft Windows operating system or who were using pirated versions of the operating system. Within a day, criminals held data on 230,000 computers in 150 countries for ransom.
The most common delivery method of this malware is through phishing emails. The emails lure unsuspecting users to either open a link or an attachment. However, the FBI also has warned that ransomware is evolving and cybercriminals can infect computers by other methods, such as a link that redirects users to a website that infects their computer.
Victims should not pay a ransom. Paying it further encourages the criminals. Often the scammers won’t provide the decryption key even after a ransom is paid.Tips to Prevent Ransomware Attacks
Tax practitioners – as well as businesses, payroll departments, human resource organizations and taxpayers – should talk to an IT security expert and consider these steps to help prepare for and protect against ransomware attacks:
- Make sure employees are aware of ransomware and of their critical roles in protecting the organization’s data.
- For digital devices, ensure that security patches are installed on operating systems, software and firmware. This step may be made easier through a centralized patch management system.
- Ensure that antivirus and anti-malware solutions are set to automatically update and conduct regular scans.
- Manage the use of privileged accounts — no users should be assigned administrative access unless necessary, and only use administrator accounts when needed.
- Configure computer access controls, including file, directory and network share permissions, appropriately. If users require read-only information, do not provide them with write-access to those files or directories.
- Disable macro scripts from office files transmitted over e-mail.
- Implement software restriction policies or other controls to prevent programs from executing from common ransomware locations, such as temporary folders supporting popular Internet browsers, compression/decompression programs.
- Back up data regularly and verify the integrity of those backups.
- Secure backup data. Make sure the backup device isn’t constantly connected to the computers and networks they are backing up. This will ensure the backup data remains unaffected by ransomware attempts.
Victims should immediately report any ransomware attempt or attack to the FBI at the Internet Crime Complaint Center, www.IC3.gov. Tax practitioners who fall victim to a ransomware attack also should contact their local IRS stakeholder liaison.
The name is somewhat misleading, as these plans are not necessarily limited to one person. A business owner’s spouse also can participate, if he or she is an employee of the business. Multiple owners or partners, and their spouses employed in the business, can participate in a Solo 401(k).
However, a business with any common-law employees is disqualified, so having an employee other than an owner, business partner, or shareholder will rule out a Solo 401(k). Note that independent contractors can be hired by the business, as well as part-time workers who get paid for less than 1,000 hours a year. Solo 401(k) plans are discretionary, so employers can cut back or even eliminate contributions in a given year, if that’s desirable.
Assuming a business qualifies for a Solo 401(k), why choose this type of plan? The answer is simple: because contributions can be relatively generous. The underlying reason is that owner-employees’ accounts receive funding from two sources.
Example 1: Nick Martin, age 55, owns 100% of NM Corp., which has elected to be treated as an S corporation. NM Corp. has no full-time employees. With a Solo 401(k), Nick can contribute the same as any employee participating in a typical 401(k) plan: up to 100% of compensation (“earned income,” for the self-employed). The cap in 2017 is $18,000, or $24,000 if Nick is at least age 50.
In addition, Nick can make employer non-elective contributions up to 25% of his compensation, as defined by the plan. Assume that Nick earns $80,000 in W-2 wages from NM Corp. in 2017. He defers the maximum $18,000 in regular elective contributions this year, plus the $6,000 catch-up for those 50 and older. NM Corp. then contributes $20,000 (25% of Nick’s $80,000 earnings) to the plan, for a total of $44,000. If Nick’s wife works for NM Corp. and receives earned income, her account can receive 401(k) contributions.
Those with higher earned income can receive larger employer contributions. In 2017, the maximum is $54,000 from employee and employer contributions, or $60,000 with a $6,000 catch-up contribution.
Special rules for the self-employed
The calculation for Solo 401(k) contributions is a bit different for self-employed participants. Here, earned income is defined as net earnings from self-employment after deducting employee elective contributions and one-half of self-employment tax. The calculation can be complex, but the resulting employer contribution might be up to 20% of self-employment income.
Self-employed individuals who file Schedule C typically deduct both the employer and employee contributions to a Solo 401(k) on page 1 of Form 1040, not on Schedule C. Therefore, these deductions reduce adjusted gross income but not reported business income. Incorporated businesses generally can deduct Solo 401(k) contributions as a business expense.
For all types of participants, Solo 401(k) plans offer another appealing feature. There is no need to perform expensive nondiscrimination testing for the plan, because there are no employees who might have received disparate benefits. Such testing may be required with standard 401(k) plans and can result in reduced contributions to business owners’ accounts. Even though nondiscrimination testing isn’t required, a Solo 401(k) plan generally must file an annual report on Form 5500-SF if it has $250,000 or more in assets at the end of the year.
The deadline for establishing a Solo 401(k) for 2017 is December 31, or the end of the fiscal year for corporations.
Accounting and Tax Service | Port St. Lucie
IRS Summertime Tax Tip 2017-10.
The federal income tax is a pay-as-you-go system. Employers generally withhold tax from workers’ wages. Taxpayers also often have taxes withheld from certain other income including pensions, bonuses, commissions and gambling winnings.
People who do not pay tax through withholding, like the self-employed, generally pay estimated tax. In addition, those who earn income such as dividends, interest, capital gains, rent and royalties are usually required to make estimated tax payments.
Each year, because of life events like changes to household income or family size, some people get a larger refund than they expect while others find they owe more tax.
- New Job. When starting a new job, an employee must fill out a Form W-4, Employee's Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from regular pay, bonuses, commissions and vacation allowances. The IRS Withholding Calculator tool on IRS.gov is easy for taxpayers to use to figure how much tax to withhold to avoid surprises.
- Estimated Tax. People who have income not subject to withholding may need to pay estimated tax. Those expecting to owe $1,000 or more than taxes withheld from their wages may also need to make estimated tax payments to avoid penalties. The worksheet in Form 1040-ES, Estimated Tax for Individuals, helps to figure the tax.
- Life Events. A change in marital status, the birth of a child or the purchase of a new home can change the amount of taxes a taxpayer owes. The Managing Your Taxes After a Life Event page on IRS.gov provides resources to explain the tax impact of these changes. In most cases, an employee can submit a new Form W–4 to their employer anytime.
Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.
Accounting and Tax Service | Stuart
IRS Says Taxpayers Should Review Their Withholding; Avoid Having Too Much or Too Little Federal Income Tax Witheld
During the year, changes sometimes occur in a taxpayer’s life, such as in their marital status, that impacts exemptions, adjustments or credits that they will claim on their tax return. When this happens, they need to give their employer a new Form W-4, Employee’s Withholding Allowance Certificate, to change their withholding status or number of allowances.
Employers use the form to figure the amount of federal income tax to be withheld from pay. Making these changes in the late summer or early fall can give taxpayers enough time to adjust their withholdings before the tax year ends in December.
The withholding review takes on even more importance now that federal law requires the IRS to hold refunds a few weeks for some early filers claiming the Earned Income Tax Credit and the Additional Child Tax Credit. In addition, the steps the IRS and state tax administrators are now taking to strengthen protections against identity theft and refund fraud mean some tax returns could face additional review time next year.
So far in 2017, the IRS has issued more than 106 million tax refunds out of the 142 million total individual tax returns processed, with the average refund well over $2,700. Historically, refund dollar amounts have increased over time.
Making a Withholding Adjustment
In many cases, a new Form W-4, Employee’s Withholding Allowance Certificate, is all that is needed to make an adjustment. Taxpayers submit it to their employer, and the employer uses the form to figure the amount of federal income tax to be withheld from their employee’s pay.
IRS Withholding Calculator – Online tool helps determine the correct amount of tax to withhold.
IRS Publication 505 – Tax Withholding and Estimated Tax.
Tax Withholding – Complete information on withholding, estimated taxes, FAQs, and more.
Self-employed taxpayers, including those involved in the sharing economy, can use the Form 1040-ES worksheet to correctly figure their estimated tax payments. If they also work for an employer, they can often forgo making these quarterly payments by instead having more tax taken out of their pay.
Tax Planning | Jupiter
Spring showers bring summer flowers and weddings typically aren’t far behind. Newlyweds have a lot to think about and taxes might not be on the list. However, there is good reason for a new couple to consider how the nuptials may affect their tax situation. Click here to read the full article from the IRS.