Tax Planning

In last month’s newsletter we presented some general facets of the Tax Cuts and Jobs Act (TCJA). In this article, we will explore some portions of the new bill in greater detail.

In general, the law cuts corporate tax rates permanently and individual tax rates temporarily. It permanently removes the individual mandate, a key provision of the Affordable Care Act, and it changes other policies in dramatic ways, such as the SALT deduction (which will be explained in more detail below).

It should be noted that the impact from the TCJA is not expected to occur until the 2018 (not 2017!) tax filing.

How the Tax Cuts and Jobs Act impacts U.S. Tax Returns

The following items which are now presented with accompanying detail were deferred from discussion last month. Other items not presented yet should be presented in following months assuming they are of sufficient materiality and general interest.

A report by Investopedia notes the following changes that will take place as a result of the new tax bill:

Income Tax Rates

The law retains the current structure of seven individual income tax brackets, but in most cases it lowers the rates: the top rate falls from 39.6% to 37%, while the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remains at 10%, and the 35% bracket is also unchanged. The income bands that the new rates apply to are lower, compared to 2018 brackets under current law, for the five highest brackets.

Standard Deduction

The law raises the standard deduction to $24,000 for married couples filing jointly in 2018 (from $13,000 under current law), to $12,000 for single filers (from $6,500), and to $18,000 for heads of household (from $9,550). These changes expire after 2025. The additional standard deduction, which the House bill would have repealed, will not be affected. Beginning in 2019, the inflation gauge used to index the standard deduction will change in a way that is likely to accelerate bracket creep (see below).

Personal Exemption

The law suspends the personal exemption, which is currently set at $4,150 in 2018, through 2025.

Inflation Gauge

The law changes the measure of inflation used for tax indexing. The Internal Revenue Service (IRS) currently uses the consumer price index for all urban consumers (CPI-U), which will be replaced with the chain-weighted CPI-U. The latter takes account of changes consumers make to their spending habits in response to price shifts, so it is considered to be more rigorous than standard CPI. It also tends to rise more slowly than standard CPI, so substituting it will likely accelerate bracket creep. The value of the standard deduction and other inflation-linked elements of the tax code will also erode over time, gradually pushing up tax burdens. The change is not set to expire.

Family Credits and Deductions

The law temporarily raises the child tax credit to $2,000, with the first $1,400 refundable, and creates a non-refundable $500 credit for non-child dependents. The child credit can only be claimed if the taxpayer provides the child's Social Security number. (This requirement does not apply to the $500 credit.) Qualifying children must be younger than 17. The child credit begins to phaseout when adjusted gross income exceeds $400,000 (for married couples filing jointly, not indexed to inflation). Under current law, phaseout begins at $110,000. These changes expire in 2025.

Head of Household

Trump's revised campaign plan, released in 2016, would have scrapped the head of household filing status, potentially raising taxes on 5.8 million single-parent households, according to an estimate by the Tax Policy Center (TPC). But the final version of the law that Congress passed and Trump signed leaves the head of household filing status in place.

Itemized Deductions

Mortgage Interest Deduction

The law limits the application of the mortgage interest deduction for married couples filing jointly to $750,000 worth of debt, down from $1,000,000 under current law, but up from $500,000 under the House bill. Mortgages taken out before Dec. 15 are still subject to the current cap. The change expires after 2025.

State and Local Tax Deduction

The law caps the deduction for state and local taxes at $10,000 through 2025. The SALT deduction disproportionately benefits high earners, who are more likely to itemize, and taxpayers in Democratic states. A number of Republican members of Congress representing high-tax states opposed attempts to eliminate the deduction, as the Senate bill would have done.

Other Itemized Deductions

The law leaves the charitable contributions deduction intact, with minor alterations (if a donation is made in exchange for seats at college athletic events, it cannot be deducted, for example). The student loan interest deduction is not affected (see "Student Loans and Tuition" below). Medical expenses in excess of 7.5% of adjusted gross income are deductible for all taxpayers – not just those aged 65 or older – in 2017 and 2018; the threshold then reverts to 10%, as under current law.

The law does, however, suspend a number of miscellaneous itemized deductions through 2025, including the deductions for moving expenses, except for active duty military personnel; home office expenses; laboratory breakage fees; licensing and regulatory fees; union dues; professional society dues; business bad debts; work clothes that are not suitable for everyday use; and many others. The moving expenses deduction is also suspended. Alimony payments will not longer be deductible after 2019; this change is permanent.

Alternative Minimum Tax

The law temporarily raises the exemption amount and exemption phaseout threshold for the alternative minimum tax (AMT), a device intended to curb tax avoidance among high earners by making them estimate their liability twice and pay the higher amount. For married couples filing jointly, the exemption rises to $109,400 and phaseout increases to $1,000,000; both amounts are indexed to inflation. The provision expires after 2025.

Student Loans and Tuition

The House bill would have repealed the deduction for student loan interest expenses and the exclusion from gross income and wages of qualified tuition reductions. The law leaves these breaks intact. The conference bill would also have extended the use of 529 plans to K-12 private school tuition, but that provision was struck down by the Senate parliamentarian as ineligible to be passed through reconciliation.

Pease

The law repeals the Pease limitation on itemized deductions. This provision does not cap itemized deductions, but gradually reduces their value when adjusted gross income exceeds a certain threshold ($266,700 for single filers in 2018); the reduction is limited to 80% of the deductions' combined value.

In conclusion, it should be evident that the TCJA touches many aspects
of the individual taxpayers’ life. Next month we will present relevant TCJA aspects of Estate Tax and Business Taxes.

President Trump signed the "Tax Cuts and Jobs Act" into law on Dec. 22, as noted and summerized from a report by Investopedia. The Senate passed the bill on Dec. 20 by a party-line vote of 51 to 48. The House passed the bill later in the day by a vote of 224 to 201. No House Democrats supported the bill, and 12 Republicans voted no, most of them representing California, New York and New Jersey. (Taxpayers who itemize and rely on the state and local tax deduction in these high-tax states will have their state and local tax deductions capped at $10,000 or $5,000 if Married Filing Separate). Generally speaking, some are concerned that this overhaul is forecasted to raise the federal deficit by a significant amount, while others say the tax cuts will significantly boost the economy and produce growth across many industries.

The law cuts corporate tax rates permanently and individual tax rates temporarily until 2025 when those individual rates would expire if they’re not renewed. The law permanently removes the individual mandate, a key provision of the Affordable Care Act.

It should be noted that the impact from the TCJA is not expected to occur until the 2018 (not 2017) tax filing.

There is a significant amount of material as it relates to the Tax Cuts and Jobs Act” (“TCJA”), and this article can only provide a brief sketch.

How the Tax Cuts and Jobs Act impacts U.S. Tax Returns

Note the following points that are affected by the TCJA and will be discussed in future newsletter articles.

1. Tax brackets are changed and tax rates are reduced for most taxpayers, some quite significantly. For example, in the old tax brackets a Married Filing Jointly taxpayer who made between about $38,000 and $92,000 fell in the 25 percent tax rate. With the new brackets, most taxpayers in that range (up to around $77k) would slide down to the 12 percent tax rate. See this snapshot of the new brackets and rates for details.
2. Personal and dependent exemptions are eliminated.
3. Child tax credit increased through 2025.
4. New credit for non-child dependents available through 2025.
5. Standard deduction is doubled through 2025. (For example, Married Filing Jointly had a standard deduction of $12,000 previously. Now it is $24,000.)

Many itemized deductions eliminated, limited or modified:

6. Fully Eliminated

a. Miscellaneous Itemized Deductions

b. Personal Casualty and Theft Losses

7. Limited

a. State and Local Income Taxes

b. Home Mortgage Interest

8. Modified

a. Charitable Contributions

b. Gambling Losses

c. Medical Expenses

Many “Above-the-line” deductions eliminated, limited or modified:

9. Fully Eliminated

a. Alimony

b. Tuition and Fees

c. Domestic Production Activities Deduction (DPAD)

10. Most education benefits remain the same, others modified. For example, the tax bill modifies this rule governing the discharge of student loans by including discharges on account of death or disability, so that such discharges are also excluded from taxable income.

11. Health care penalty eliminated.

12. Self-employed taxpayers may claim a new deduction for qualified business income.

13. Taxpayers may benefit by adjusting withholding and estimated taxes.

In conclusion, with such sweeping changes, it would be advisable that the taxpayer start meeting with their tax professional to undertake a planning process that centers on the taxability of their 2018 tax year.

On September 27, 2017, the Trump Administration and select Republican members of Congress released a “unified framework” for tax reform. The document provides more detail than a number of other tax reform documents that have emerged from the Administration over the past few months, but it still leaves many specifics to be worked out by the tax-writing committees. The term “framework” means it is not the finished bill or a draft of actual legislation. The framework is subject to change after the September 27, 2017 issuance of the framework.

The so-called Republican framework is the result of several months of discussion among the “Big Six”—House Speaker Paul Ryan, R-Wis., Senate Majority Leader Mitch McConnell, R-Ky., Treasury Secretary Steven Munchin, White House adviser Gary Cohn, House Ways and Means Committee Chairman Kevin Brady, R-Texas, and Senate Finance Committee Chairman Orrin Hatch, R-Utah. It’s worth noting at this point that the framework does not have the weight of the full House and full Senate, which is something that will still have to happen before the framework can evolve into final legislation. This fact equates to a lot more discussion, debate, and voting. [Update: On Oct. 26, 2017, the House passed a budget that clears the path for finalizing and passing the tax reform, though many details must still be decided before it becomes final legislation.]

According to CNN Money, the following tax reform provisions are addressed within the Republican Tax Reform Framework, though again, as noted above, there is still time for Congress to negotiate, adjust and change the details before anything is set in stone.

How Individual Taxes Will Change

Reduce individual income tax rates: The framework shrinks the number of tax rates to just three from seven today. The proposed rates are 12%, 25% and 35%. But it will be up to the tax committees to assign income ranges to each rate. Also, the drop in the top rate to 35% from 39.6% may not stick. The framework gives tax legislators the "flexibility" to add a fourth rate above 35% to ensure reform keeps the tax code at least as “progressive” as the current system.

[CNN points out that if 35 percent remains the top rate, Democrats will charge that reform is just giving a big tax cut to the wealthy. That’s not necessarily true. For example, the other tax rates in the new plan could potentially allow some middle class earners in the current 25 percent bracket to drop down to the new 12 percent bracket, depending on how Congress defines the income range for each new bracket. Those in the current 15 percent could also have their taxes reduced to 12 percent. Nothing is known for sure yet, however, and both sides are trying to score political points. At this point it is pure speculation until Congress decides on income ranges and releases the final details.]

Increase standard deduction: The plan doubles the standard deduction, to $24,000 for married couples and $12,000 for single filers. Doing so would drastically reduce the number of people who opt to itemize their deductions, since the only reason to itemize is if your individual deductions combined exceed the standard.

Increase child tax credit: The framework calls for a "substantially higher" child tax credit, which today is worth $1,000 per child under 17. It will be up to lawmakers to determine how much higher to make it. In addition, it would raise the income thresholds for eligibility for the credit, meaning more people would qualify for it.

Get rid of certain tax breaks: In CNN’s report linked above, they mention that the framework initially proposed the elimination of most itemized deductions, including the state and local tax deduction. However, Congress is still negotiating these terms. Several important Republicans want to keep the state and local deduction and a compromise is reportedly in the works.

CNN also notes that the tax reform might eliminate personal exemptions, worth $4,050 per person. So a family of four could no longer reduce their taxable income by more than $16,000.

However, the family of four’s standard deduction would also be doubled to $24,000, they could qualify for a lower tax bracket and their child tax credit would also be substantially increased, according to the report above about what might be in tax reform. It’s possible, therefore, that the tax reform could still lower the overall tax obligation for the family.

The point here is that it’s difficult to condemn or praise the tax reform (which also largely depends on your political worldview) until the legislation is finalized.

Preserve some deductions: Again without specifics, the framework calls for lawmakers to retain tax incentives for home ownership, retirement savings, charitable giving and higher education. But that doesn't mean lawmakers won't seek to modify the tax breaks that currently exist in these areas.

Repeal the Alternative Minimum Tax: The AMT most typically hits filers making between $200,000 and $1 million. It was originally intended to ensure the wealthy pay at least some tax.

Kill the estate tax: What Republicans refer to as the "death tax" only affects about 0.2% of all estates--and only those worth more than $5.5 million.

How Business Taxes Will Change

Cut corporate tax rate to 20%: Such a drastic drop from today's 35% rate would put the U.S. rate below the 22.5% average in the industrialized world. But doing so will be expensive. It's estimated to cost roughly $1.5 trillion over a decade.

Drop tax rates on small businesses and other pass-throughs: The top rate would be 25% down from 39.6% on the profits of so-called pass-through businesses. The framework will recommend the committees include measures to prevent gaming, in which people try to recharacterize their wages as pass-through profits to get the lower rate.

There’s no indication of when the tax reform provisions would go into effect (other than an expensing provision that would apply after Sept. 27, 2017). Presumably, the changes would apply next year (2018).

In conclusion, we recommend taking the wait and see approach. There is much back and forth that still must take place, though at this point it appears that Congress might have finalized legislation before Thanksgiving 2017.

Trump administration officials and congressional Republican leaders are negotiating the terms of a tax reform bill. While they have not introduced legislation or a detailed plan, here are some of the latest news items detailing what we know so far about their goals and possible intentions with respect to taxation of income flowing through pass-thru entities—and only applying to pass-thru entities. The following update is based on what they have said so far, as published in a July 27, 2017 report by the Washington Examiner.

However, to gain a more up-to-date overall perspective of what has transpired up to this point with tax reform, please refer to the article at the CPAGardens website entitled Trumps Tax Plan Unleashed, category “Tax Strategies,” posted on January 11, 2017.

Focusing On Pass-Thru Taxation

Perhaps one of the most significant reforms noted has to do with the policy question of “Pass-Thru Taxation.” This term is more accurately described as “taxation of income flowing through pass-thru entities”:

1.  Pass-throughs are businesses that pay their taxes through the individual income tax code rather than through the corporate code.

2.  In contrast, traditional C corporations can retain earnings without distributing them immediately to any particular shareholder.

3.  However, there are multiple interpretations of the proposed tax plan because the plan is not finalized.

Currently, the clearest understanding of the current plan is as follows:

• Pass-throughs are not eligible for a single 15 percent tax rate on the individual income that their owners report.
• At best, they may be allowed to adopt some kind of tax status similar to that of C-corporations, either on a temporary or permanent basis.

As noted, some of the latest news has the House Republicans favoring a new special top tax rate for businesses that file through the individual side of the tax code. The House Republican plan would set that rate at 25 percent, while the Trump plan would make it even with the corporate rate at 15 percent.

A joint statement between the Republication House and the President didn't specify where the rate would be. However, the special tax rate would ensure that mom-and-pop businesses get tax cuts with giant C-corporations. A significant portion of pass-through income goes to big businesses, and about half flows to the top 1 percent of income earners.

In conclusion, at this point in the negotiation process it is difficult to predict with any degree of certainty which of the proposed terms will be included in the bill. So far, there is no finalized proposed plan. With respect to timing, House Speaker Paul Ryan at the CNN Townhall on August 21, 2017 stated that he is committed to finalizing tax reform by the end of the year. Wether that is what really happens remains to be seen.

The foregoing discussion is presented merely for information purposes and should not be relied on for planning purposes. We highly recommend that you speak to your tax advisor concerning the impact of the foregoing on your personal tax situation.

Although the official tax filing date has passed us by, the subject matter of this blog is still relevant because many taxpayers have filed extensions and have a number of months before the extended filing date is final.

Immunity from making mistakes on your tax returns is something that no one can ever really guarantee. Some mistakes are accidental while other kinds of mistakes are not so accidental or are intentional.

Unfortunately, even accidental mistakes are liable for penalties and interest. If proven to be intentional, or fraudulent, the penalties for committing fraud can be much more severe.

At times there can be a fine line between honestly taking every deduction you think you are entitled to and being overly aggressive.

In fact, in some cases it’s gotten out of hand, as USA Today has reported:

Those who file “Schedule C” tax forms--sole proprietors who file individual, not company, tax returns--under-report income by a whopping 57%. The IRS knows this, and it’s one reason that the IRS has small businesses and sole proprietors in its sights.

Their report recommends that businesses avoid the following six mistakes:

1. Hiding income: If you do a lot of business in cash, it can be tempting to stash that cash rather than reporting it. The IRS knows that cash-heavy companies and independent contractors who typically get paid less than $600 (the threshold for filing a form 1099) often under-report income, and they’re on the lookout for them.

2. Not reporting trackable income: If you’re an independent contractor, any company that paid you more than $600 in 2016 must send you and the IRS a “Form 1099” reporting your total income. Thus, the IRS knows how much you’ve earned. They’ve got your number, so report it.

3. Deducting startup expenses: Startup expenses are treated differently than other business expenses. You can only deduct $5000 of startup expenses incurred before the business starts. All expenses over that amount must be depreciated over 180 months.

4. Going crazy with deductions: One of the benefits of owning a small business is that you have quite a few legitimate deductions available to you. But trying to deduct all the costs of that week-long family trip to Hawaii because you met with one potential customer for an hour? Not so fast. Travel, entertainment, and meal expenses are the ones most likely to be scrutinized.

5. Having a hobby business: The IRS is skeptical of businesses that look like hobbies. If you don’t make a profit three years out of five, the IRS will need you to show you’re really working at making a profit and have a reasonable expectation of doing so.

6. Taking the home office deduction: The IRS allows you to deduct the expenses of using a portion of your home as your primary office or workspace. In other words, if every day you use your guest room as your office but once a year your mother-in-law stays in it when she visits the grandkids, you no longer qualify for the home office deduction.

And if these 6 mistakes aren’t enough to satisfy your curiosity then there are a few more here, as reported by American Express:

Filing certain forms and schedules. Some of these are actually invitations to be audited. For example, if you start a business and want to keep the IRS from challenging it as a hobby activity for which losses will be disallowed, you can file Form 5213.

This prevents the IRS from auditing you for five years in most cases. But at the end of this period, the IRS will likely review your returns for these years to see whether you’ve met the presumption for a profit motive (being profitable in three out of five years). Think very carefully before you file any form.

Overreporting income. If you sell goods on which you collect sales tax, your reportable income should not include the sales tax. Be sure to subtract the sales tax before reporting the income from the sales.

Misclassifying workers. Make sure the workers you pay as independent contractors aren’t really employees. This hot audit issue can result in significant payroll tax penalties if you’re wrong. Understand the IRS tax rules for worker classification, which you can find here.

Paying sufficient enough attention to detail can result in a significant and favorable tax savings, let alone keeping the IRS “audit squad” at bay.

Furthermore, it will pay dividends if you engage the support of a CPA or tax attorney.

“And they’re off!” If you’ve ever been to a horse race, the phrase should sound familiar. Those words apply now: the rush to file a complete and accurate tax return on time has begun.

But, as The Muse warns, the more you rush, tax pros say, the more you’re likely to make mistakes that can cost you in the form of penalties, a delay in getting your refund, and even a higher risk of an audit. Avoiding the following seven mistakes will contribute to keeping your return error free.

1. Math Miscalculations

As BankRate notes, the most common error on tax returns, year after year, is bad math. Mistakes in arithmetic or in transferring figures from one schedule to another will get you an immediate correction notice. Math mistakes also can reduce your tax refund or result in you owing more than you thought.

Using a tax-software program to file your return can help reduce math errors. But you still have to make sure your initial numbers are correct.

In addition, The Muse notes the following three points about overlooking income, forgetting to double-check information, and failing to itemize deductions.

2. Overlooking Income

The IRS requires you to claim all income, regardless of whether or not you received a W-2 or 1099 from an employer. Failing to disclose income is a common issue for last-minute filers—and an oversight the IRS is keen to uncover. And once the IRS realizes you owe more, you’ll be on the hook for the extra tax, plus penalties and interest. So even if you only worked a side job for a day, the income you received is still taxable, and you must claim it on your return.

3. Forgetting to Double-Check Numbers and Signatures

One of the most common tax mistakes, according to the IRS, is an incorrect Social Security number, so make it a point to check that you haven’t accidentally transposed the digits. And if you’ve opted for a direct deposit refund, you should also make sure that your bank account information is accurate.

4. Failing to Itemize Deductions

Taking the standard deduction may seem like the simplest and easiest route when doing taxes, especially if they’re pressed for time. But itemizing your deductions can sometimes save you a bundle.

5. Inaccurate Account Numbers

As this expert notes, you should always double-check your bank account and routing numbers if you want your refund direct deposited or if you’re making an electronic tax payment. Entering incorrect information can delay your refund or result in penalties and interest on late payments.

6. Changes in Your Filing Status

In addition, as Accounting Today observes, If the taxpayer was married or divorced or their household situation otherwise changed, it may need to be reflected in their official filing status.

7. Tax Deductible Charitable Contributions

The taxpayer may be able to deduct the value of their contributions when itemizing their return. Make sure to list all charitable contributions and check the math to see if the overall value is correct.

According to The Muse's interview with Koreen Jervis, an enrolled tax agent with Korjé Tax Professionals in New York City, when in doubt, “find a good preparer.” Ask for an extension, and then seek assistance from a skilled tax preparer because there are situations in which even the best tax software will not help.

Since 2015, when the Fixing American’s Surface Transportation Act was passed by Congress, world travelers who owe the IRS money have found that it’s no fun to owe a tax debt. In fact, it can ground any and all international travel plans indefinitely.

As noted by Jim Buttonow of Accounting Today:

…FAST Act is Section 7345 of the Internal Revenue Code, which requires the IRS to provide information to the U.S. State Department about people who owe “seriously delinquent tax debt.” Then, the State Department can deny, revoke or limit the ability of these individuals to use their passports – until they are back in good standing with the IRS.

The following 10 Q & A points about the FAST Act, also from Buttonow’s report linked above, are quoted and summarized in a more abbreviated form so that you can quickly digest the main points of how the FAST Act could affect you if you owe taxes:

1. What is the new passport-restriction program (IRC Section 7345)?

IRC Section 7345 requires the IRS to identify and “certify” individuals who have “seriously delinquent tax debt,” and provide this certification to the State Department. In turn, the State Department can essentially limit or completely stop the individual’s travel plans outside the US until the would-be traveler gets into good standing with the IRS.

2. Why did Congress create passport restrictions?

In 2011, the Government Accountability Office issued a report that examined the potential for using passports to increase tax-debt collection. The report found that 224,000 people who owed collectively more $5.8 billion in unpaid federal taxes received passports in 2008.

The report recommended that Congress enable a more coordinated effort between the IRS and State Department to go after these unpaid taxes, using passports as leverage. The report received a lot of national press, and the link between federal tax debt collection and passports became law in 2015.

3. Who is Affected?

The passport restriction will affect people who travel internationally and owe seriously delinquent tax debt. This includes people with passports and those applying for or renewing passports.

Who is an individual with seriously delinquent tax debt? Section 7345 defines this person as owing a legally enforceable tax liability of more than $50,000 (unpaid taxes, penalties and interest combined), with:

• A lien filed, and all administrative remedies for lien relief have lapsed or been denied;
• or, a levy issued.

There are certain exceptions. The IRS won’t consider people in the following situations to be individuals with seriously delinquent tax debt, because these people are in good standing with the IRS:

• People who are in an IRS installment agreement to pay their taxes.
• People who have settled their debt through an offer in compromise or Justice Department agreement. 
• People who appeal a levy through an IRS collection due process hearing. 
• People who request innocent spouse relief (Form 8857). 

Based on this list of exceptions, the way to avoid being certified by the IRS as an individual with seriously delinquent tax debt is to get into an agreement with the IRS to pay the balance.

4. What will happen to the person who owes seriously delinquent tax debt?

Before the State Department revokes a passport, the State Department may limit the passport so that the individual can only travel back to the United States. It’s unclear how the State Department will use its discretion on limiting and revoking passports.

5. How can taxpayers get their passport restrictions lifted?

To get out of the passport restriction, individuals must get back into good standing with the IRS. For most taxpayers, that will mean paying the entire tax bill or, more likely, setting up an installment agreement with the IRS.

6. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions?

The short answer from the IRS is no. Just reducing the amount under $50,000 will not decertify the taxpayer. 

7. Can taxpayers appeal their seriously delinquent tax debt certification?

Under Section 7345(e), taxpayers can appeal their status in federal district court or U.S. Tax Court. But the taxpayers’ passports will remain restricted while they appeal. For taxpayers who are surprised by their passport restrictions when they try to travel, the best way to expedite travel is to obtain a quick installment agreement.

8. What if taxpayers don’t think they owe the tax?

To get immediate relief, the only quick option is for taxpayers to pay the balance, or more likely, set up an installment agreement, and contest the tax later with the IRS.

9. Is there an expedited process to remove passport restrictions?

Right now, there’s no provision to expedite removal of passport restrictions after a taxpayer gets in good standing with the IRS. As the law is implemented, look for the IRS and the State Department to develop expedited procedures to relieve taxpayer burden.

10. What can a seriously delinquent tax debtor do to avoid passport restrictions?

Basically, taxpayers can avoid passport restrictions by meeting an exception outlined above – all of which mean getting into good standing with the IRS.

As Buttonow makes clear in his report: don’t assume it’s safe to make travel plans if you owe taxes. There are problematic ramifications of not being in good standing with the IRS when you intend to use your passport to travel outside the country.

For this reason, we highly recommend you meet with your CPA as part of your pre-trip planning process to put in place payment arrangements with the IRS sufficiently in advance of taking your trip.

It is crucial to understand your small business’s tax responsibilities, and there are real risks if you do not. Mismanagement of your tax obligations can ultimately lead to liens, bank levies, collections and wage garnishments, just to name a few of the potential risks. A tax lien, and the collection process it entails, can damage your credit and force you to work through many obstacles and headaches, including the task of requesting a certificate of release. It can also adversely affect your chances of obtaining financing for your business. Simply put, an I.R.S. tax lien means putting your business at the increased risk of failure.

Do Certain Types of Businesses Have More Risk?

Many wonder if certain types of businesses--i.e. specific industries, business structures, number of employees, revenues of business-- are more likely than others to be at greater risk because their tax liability is more complicated and difficult to decipher.

However, greater complication doesn’t always mean greater risk.

In general, the larger a business is in terms of revenue the more sophisticated it should be in terms of implementing policies, procedures, and internal accounting controls that should reduce the risk of not understanding its tax liability--but not always. The opposite would be expected to be true the smaller a business is in terms of revenue. Smaller businesses tend to be more fixated on developing more business and "surviving."

Some businesses even have different classes of employees. For example, an employee working the graveyard shift might be paid different rates than another employee performing the same task who is working a normal 8 to 5 shift. This risk can be managed in part, however, by engaging an outside service bureau specializing in processing the payroll of clients, as discussed below.

Important Federal Tax Exposures and the Question of Independent Contractors and Employees

The I.R.S. is responsible for collecting employment taxes, which includes federal income tax and unemployment insurance. The classification of independent contractor or employee has a significant impact on the amount of money concerning these types of taxes.

The I.R.S. periodically conduct audits of businesses to ensure that workers are properly classified as either independent contractors or employees. In the event of such an audit the burden of proving that a "worker" is an independent contractor, and not an employee, rests on the shoulders of the employer.

Over the years, courts have identified on a case-by-case basis various facts or factors that are relevant in determining whether an employer-employee relationship exists. In 1987, based on an examination of cases and rulings, the I.R.S. developed a list of 20 factors that may be examined in determining whether an employer-employee relationship exists.

Unfortunately, there's a lot of "wiggle room" involved with applying the 20-factor test, so it is advisable to seek the assistance of an experienced tax attorney in order to obtain a more objective viewpoint of the particular circumstances at hand.

Common Mistakes that Business Owners Make

The following issues outline some of the most common errors that business owners make as they attempt to manage their tax responsibilities:

• Income tax

Filing your tax return after the mandated filing due date: a penalty can be imposed for failing to file a tax return by the required due date. This penalty is imposed in addition to the penalty and interest imposed for failing to pay the taxes you owe.

• Estimated tax

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

• Self-employment tax

Being "self-employed" does not mean carrying a regular full-time business. A part-time business (for example fixing bicycles in your garage) in addition to your regular job or business may also qualify as being self-employed.

• Employment tax

Federal and State withholding taxes are employment taxes deducted from employees' gross pay to arrive at the employees' net pay. The withheld taxes are the property of and belong to the employee. In some cases, employers will "borrow" (for whatever purpose), rather than remit to the taxing authority, these Federal and State withholding taxes. Employers can be found personally liable for withholding taxes actually withheld from employees' paychecks that are not remitted to the taxing authority.

Final Thought: Establish a Routine and Plan Ahead with Projections

The businesses that successfully navigate their tax responsibilities are the ones that implement a routine of "tax planning." Get a head start on the process by doing income and expense projections so that you can budget for your inevitable income tax liability and avoid any unpleasant surprises.

Many people use the term “tax planning,” but it is often misunderstood. It is the art of learning how to manage your affairs in ways that postpone or avoid taxes. Skilled tax planning means more money to save and invest, and it can make the tax season more of a financial boost instead of a financial burden. As explained well by Wealth Plan: “tax planning means either deferring or avoiding taxes by taking full advantage of the beneficial tax-law provisions, increasing tax deductions and tax credits, and by making good use of all applicable breaks that are available under the Internal Revenue Code.”

Strategies are typically designed and employed to achieve goals--a series of steps undertaken to accomplish an intended end. Of course, strategies within the realm of tax planning are undertaken to achieve financial goals primarily, but they are also employed to achieve business goals. If your tax planning strategies are effective, they should successfully accomplish, or at least address, the following goals:  

1. Lower your amount of taxable income
2. Reduce the rate at which you are taxed
3. Empower you to control when taxes get paid
4. Ensure you get all credits available to you
5. Put you in charge of the Alternate Minimum Tax

Note the following sample of strategies intended to reduce one’s tax liability, as noted by Cash Cow:

1. Maximize Retirement Contributions: Deferral of taxation is one of the most common and useful tax strategies for individuals who are currently in a high tax bracket, but if you follow this path anticipate being in a lower tax bracket at some point in the future when withdrawals (distributions) are taken.

2. Harvest Investment Losses: You can offset unlimited investment gains, and up to $3,000 of ordinary income each year by selling your investments that have lost value. If your losses exceed your gains and the $3,000 of ordinary income, you can carry them over to be used in future tax years.

3. Consider Charitable Gifts: This strategy is only useful if you can itemize your tax deductions (most often due to mortgage interest deductions), and plan on making donations. Appreciated assets are some of the most tax-efficient charitable donations. Donating these assets will allow you to avoid paying capital gains on the appreciation.

4. Invest In Municipal Bonds: Some high income earners are now subject to the 3.8% Medicare surtax on all investment income. Municipal bonds avoid this additional tax, and typically avoid all Federal and State income taxes. That means the tax equivalent yield (the yield an investor would require from a taxable bond) has increased for those taxpayers, making muni-bonds more attractive.

There are other creative ways to achieve effective tax planning, including these two tips from My CPA Team:

1. Gifting Assets to Your Children: You can gradually take money out of your estate by giving it away. If your estate is larger than the normal exclusion amount, you can reduce its value by giving away $14,000 per year to each of your children, grandchildren, or anyone else without paying federal gift taxes. Your spouse can gift money as well, thus allowing a total $28,000 gifting capability between the two of you each year per recipient.

2. Deduct a Home-Based Office When Used for Your Employer: People who work for companies whose headquarters or branch offices are not located in the same city as the employee, or outside salespeople who often use their home office as a base, can often use these deductions. There are rules that must be followed in these cases, however, and it is wise to consult a professional before diving into the details.

In conclusion, you might be able to see that the tax planning process is not something that can be done in one day at the last minute. Time must be invested throughout the year to identify opportunities for savings as well as effective solutions to accomplish your tax planning goals.

Image courtesy of Tax Credits @ Flickr

The following questions and answers provide information to individuals of the same sex who are lawfully married (same-sex spouses). These questions and answers reflect the policy outlined in Revenue Ruling 2013-17 in 2013-38 IRB 201.

Q1. When are individuals of the same sex lawfully married for federal tax purposes?

A1. For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex, even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

Q2. Can a taxpayer and his or her same-sex spouse file a joint return if they were married in a state that recognizes same-sex marriages but they live in a state that does not recognize their marriage?

A2. Yes. For federal tax purposes, the IRS has a general rule recognizing a marriage of same-sex individuals that was validly entered in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex, even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages. 

Q3. Can a taxpayer’s same-sex spouse be a dependent of the taxpayer?

A3. No. A taxpayer’s spouse cannot be a dependent of the taxpayer.

Q4. If same-sex spouses (who file using the married filing separately status) have a child, which parent may claim the child as a dependent?

A4. If a child is a qualifying child under section 152(c) of both parents who are spouses (who file using the married filing separate status), either parent, but not both, may claim a dependency deduction for the qualifying child.    

Q5. Can a taxpayer who is married to a person of the same sex claim the standard deduction if the taxpayer’s spouse itemized deductions?

A5. No. If a taxpayer’s spouse itemized his or her deductions, the taxpayer cannot claim the standard deduction (section 63(c)(6)(A)).

Q6. Can a same-sex married couple elect to treat a jointly owned and operated unincorporated business as a Qualified Joint Venture?

A6. Yes. Spouses that wholly own and operate an unincorporated business and that meet certain other requirements may avoid Federal partnership tax treatment by electing to be a Qualified Joint Venture.

Related Items:

• Forms and Publications

• IRS YouTube Video: Tax Information About Same-Sex Marriage in English / Spanish / ASL

• IR-2014-22, New IRS Video Helps Same-Sex Couples; Joins Extensive IRS Library Of Online Tax Tips

• IR-2013-72, Treasury and IRS Announce That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes; Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples

• Frequently Asked Questions on Estate Taxes (estate tax marital deduction for same-sex couples)

• Frequently Asked Questions on Gift Taxes (gift tax marital deduction for same-sex couples)