Wednesday, June 20, 2018

Common Tax Myths

This is one of the new chapters in the 2018 edition of Everyday Taxes (coming out soon).  It may seem like I am just pimping for the new book since it keeps referring to information in the book, but that's just because I copied it right out of the book, which links internally to chapters on the subject, and I was too lazy to link to a website.

There are a lot of myths and confusion out there, and I’m going to try to clear a few of them up.  Some are a big deal, others are a bit nitpicky.

1. You do NOT have to buy a new house in order to exclude the gain from the sale of your personal residence.  I have a whole chapter on it in the book, but, basically, if you owned and lived in the home for 2 of the last 5 years, never rented it out and never used it for a business, you can exclude $250,000 of gain ($500,000 if Married Filing Jointly and both of you meet the timing rules) regardless of what you do after selling.

2. Moving up tax brackets is a good thing.  It means you made more money.  Only the part of your income that is in the higher bracket is taxed at the higher rate, everything else is taxed at the lower rates based on what bracket THAT income falls into.  The only real trick about crossing tax brackets is when your household has multiple sources of income.  If all your (and your spouse’s) jobs fall into the 12% tax bracket, but together you hit the 22% bracket, your withholding is not going to keep up very well.  This is a source of endless frustration for people using software that updates their refund constantly.  I talk to a lot of people who put their income information into the software, and then freak out when the really big refund plummets as they put their spouse’s income in.  The refund is only useful as a number when you are done – don’t look at it along the way.

3. Deductions are nice, but not spending money on things you don’t want or need is better.  Just because you can deduct something doesn’t make it a good idea – you are only getting pennies on the dollar back in taxes.

4. Income tax is voluntary, 16th amendment was never ratified, income tax is tax is illegal or any other scheme that avoids taxes.  The IRS refers to them as frivolous tax positions and you can be fined just for using the arguments in IRS proceedings.  Most of these have been thoroughly litigated through Federal courts, many all the way to the Supreme Court ruling on them or refusing to review a lower court ruling against them.  Here is the IRS page on the subject: https://www.irs.gov/pub/taxpros/frivolous_truth_march_2018.pdf

5.  Individual Retirement Accounts (IRAs) are not an investment, they are a shelter AROUND an investment.  This may not seem like a big deal, but it matters because a lot of times people open IRA’s and think that means they have worthwhile investments in them.  If you open it at a bank, this will often be a money market account or Certificate of Deposit which is wholly unsuited as a retirement investment for most people.  The process of opening an IRA involves setting up the account AND determining what an appropriate mix of investments is for the account.  You can have almost any common investment in your IRA: Stocks, bonds, mutual funds, publicly traded partnerships, exchange traded funds, closed end funds and much more.  An IRA should be opened with the help of a competent financial professional or after you have done a lot of personal investment research.  You should also consult your tax professional to make sure there aren’t income limitations regarding how much you can invest.  

6.  Head of Household means something different for taxes.  In life, you can be the head of your household, but it doesn’t mean that’s your tax filing status.  For taxes, Head of Household means you are unmarried and are taking care of a certain type of qualifying child for a certain amount of time.  The rules are covered in the Filing Status chapter of the book.  Starting on 2018 returns, the IRS is going to be taking a harder look at Head of Household and fining tax preparers who don’t exercise due diligence when determining if their clients can file as Head of Household (this is a big deal, because in most cases I can believe anything you tell me and not get in trouble.  There are very few things that I can be fined for if I’m not being suspicious enough regarding what a client tells me).

7. Social Security is taxed in a weird way.  Also, if you retire before reaching your full retirement age, you have to pay back Social Security if you make too much money from a job or business.  People confuse these things repeatedly.  Up to 85% of your Social Security can be subject to tax if you have other income.  I cover the details in the book.  This calculation of taxability applies no matter how old you are.  Having to pay back Social Security if you make too much money only applies when you are below full retirement age, and the numbers are a lot stricter (though this is NOT my area of expertise).

8. Tips are taxable income.  You are responsible for reporting them to your employer so it can be included on your W-2 and have various taxes withheld from your paycheck to cover the tips taxes.  Even if your employer doesn’t insist that you report them (or actively discourage you from reporting them) does not relieve you of responsibility to report them.  I’m not your Mother or Father, so do what you want, but recognize that failing to report tips is tax fraud and may be other types of fraud if you receive other benefits or subsidies based on your income.  


9. This is pure tax professional nit picking here: You file a tax RETURN to determine the amount of REFUND you get or your BALANCE DUE that you have to pay.  The money you get is not your return it is your refund.  You only get a refund if you have too much in taxes withheld from your paycheck and/or you qualify for a refundable credit such as Earned Income Credit, American Opportunity Credit, Electric Vehicle Credit, Solar Credit etc.

Saturday, April 21, 2018

Quick Hit Thoughts on the Trump Tax Law - Post Tax Season Edition

So shortly after the tax law was passed, I wrote a book about it (The Short Cheap Tax Book on the Trump/GOP Tax Law).  In the book, I included a link to a spreadsheet that I created to convert a 2017 tax return into a return using the new law.  I took every tax return I did (646 of them) and used this spreadsheet to determine how much taxes would be paid under the new law as opposed to the current law (later my tax software was updated to do this automatically).  Below are results based on those calculations, as well as some conjecture and suggestions.

But first, some caveats: while the spirit of the below discussions is true, ANYTHING that could even remotely risk disclosing of private client information has been modified to maintain the basic truth of the situation while eliminating the risk of disclosure.  Any opinions are my own, and not those of the IRS or my employer.  None of this information or advice should be relied on as the sole source of decision making data.  Advice you can count on and use is paid for ;).  My dataset is skewed by my region and my clients.  For example, only 2 of my clients made more than $315,000 the point at which the new tax law gets weird for businesses.  I also do a high proportion of military clients and rental property owners.

So here are the bullet points:

27 of the 646 tax returns would do worse under the new law.

People with children under 17 did especially well, especially those who made over $100,000.

Small business owners and rental property owners did well.

Very low-income families did better, but not as much better as families with middle to higher incomes.

Truck drivers, flight attendants, outside salespeople, and people who work from home did very poorly.  If you are one of these you need to take a serious look at what you are withholding.  Basically, if you have a large amount of deductible employment expenses - you're about to get screwed.

Upper and middle-class families with large amounts of itemized deductions didn't do well.

People making over $200,000 did very well, especially if they had children under 17.

People filing Head of Household are going to do well under the new law (unless they've been lying about it).

I have about 20 clients subject to the Alternative Minimum Tax - none of them would be under the new law.

Married Filing Separately will be even less desirable next year compared to Married Filing Jointly.

Most people's paychecks went up in late February as they lowered withholding to adjust for the new tax rates.  Most people didn't realize this was why.

Between a gut feel based on looking at the new withholding tables, and reviewing information from clients who brought in pay stubs, I'm pretty sure the tables overestimate the effect of the law, such that most people will get a smaller refund next year, though they are getting that money in their paychecks.

If you had a very small refund last year ($1000 or less), you should probably drop your withholding allowances by 1, or use the IRS withholding calculator to figure out what you should be claiming.

Don't be surprised if you get a lot more questions about filing Head of Household next year.  They added it to the list of things (now 4 of them) that we can be fined for if we aren't suspicious enough about it (called due diligence).


Tuesday, April 17, 2018

Master Index of Posts



I've compiled a Master List of my posts for easy reference. Not every post is included, and I have changed the order to put the most important or timely ones on top, and to group some based on categories (Military, Obamacare, Tax Software). I will try to keep this updated and just below the latest post. Please let me know in the comments if I screw up a link :) Some of the posts are OLD so be careful assuming the information is current.

If you have a Kindle, you can get a copy of my entertaining and useful book, The Short, Cheap Tax Book for Everyone for only 99 cents!

For the new tax law, there's The Short Cheap Tax Book for the Trump/GOP Tax Law

If you like the blog, buy my other books: Kirk Taylor, EA Author Page

Important or Time Sensitive Posts

Quick Thoughts on the New Tax Law (Post Tax Season Edition)
2018 Tax Bill Changes
What the New Tax Law Didn't Change (2018)
Solar Credits and Solar Sales
"Office" Hours for Questions
Will Your Refund be Delayed (2016 Tax Year)
Tax Identity Theft State Efforts and Delays (2016 Tax Year)
The Dreaded CP2000 Letter from the IRS
Need a Copy of Your Tax Return? Get a Transcript Online! NOT! Updated advice...
The IRS did NOT Call You!
I Got an E-mail from the IRS!
I Want to Lower my Taxes!
Last Chance for 2013 Refunds
10 Simple Pieces of Tax Advice
10 Things Everybody Should Do
Check Your Withholding

Military

Military Spouses Residency Relief Act Details and Matrix
Retiring from the Military? Tax Warnings!
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
2017 Military State Tax Guide
2016 Military State Tax Guide
2017 Boomer Deduction Worksheet
2016 Boomer Deduction Worksheet
2015 Military State Tax Guide
2015 Boomer Deduction Worksheet
2014 Boomer Deduction Instructions for TurboTax Online
2014 Boomer Deduction Instructions for H&R Block at Home (store bought or downloaded)
2014 Boomer Deduction Instructions for TaxSlayer
2014 Boomer Deduction Instructions for TurboTax (Store bought or downloaded)
Boomer Deduction - History and References
More Boomer Deduction Information
Minnesota Combat Zone Credit
SC Military Retirement Change (2016)

Tax Software

TurboTax Admits That Easy Is Better Than Accurate
Tax Preparation Software Sucks - An Open Letter to H&R Block

Business Guides

Sole Proprietorships are Bad
Avon, Pampered Chef, Party Lites, Amway, etc. MLM Tax Guide
UBER Driver Tax Guide
Tax Guide for Contractors - or - 1099MISC WTF?
Real Estate Agent Tax Guide

General Posts

Getting Married? One Piece of Important Tax Advice.
The Dreaded CP2000 Letter from the IRS
Investing and Taxes - A Primer
How Much does it Cost to File Taxes?
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
Open a Roth IRA Today! And Not For the Reason You Think
Foreign Earned Income Exclusion Warnings - Update
Charity Made Simple
How Fast Can I Get my Refund?
Make Estimated Tax Payments the Easy Way
Depreciation Recapture - an inaccurate description
Don't Touch that 401K or IRA!!
What do you do with that Big Tax Refund?
It's Okay to Get a Big Refund - Really...
Common Tax Return Errors - Updated
Common Tax Return Errors
I Have a Blog and I Want to Bitch!
Mortgage Tax Credit Information
Lesson from the Government Shutdown - Emergency Fund
Don't Pay Capital Gains Taxes if You Don't Have To!
I got a 1099C - Now What?
Cancelled Debt and Insolvency
The IRS, email and privacy...
IRS Checking Facebook?
>$250 Donation Acknowledgement
Drop Box Donations - US Marines
Tax Scams
Rental Property Guide for Homeowners
Taxes and Divorce
Random Thought about Books
Taking Care of the Client
Warning - Tax Resolution Scams
Foreign Earned Income Exclusion - WARNINGS!
IRS.GOV Website Update

Affordable Care Act (Obamacare) Posts

Obamacare in SC - Something's Fishy
The Affordable Care Act (Obamacare) and People with Health Insurance
Affordable Care Act (Obamacare) for the 2014 Tax Filing Season
Obamacare, Affordable Care Act and Married Filing Separately - Warning
Affordable Care Act, Obamacare update and advice
Healthcare Law, Obamacare, Affordable Care Act Info
Weird Obamacare Strategies and Incentives - 1
Weird Obamacare Incentives and Strategies - 2
Weird Obamacare Incentives and Strategies - 3
Weird Obamacare Incentives and Strategies - 4
Weird Obamacare Strategies and Incentives - 5
Weird Obamacare Strategies and Incentives - 6

Sunday, April 1, 2018

"Office" Hours

I've decided to set up a little time outside of tax season specifically for handling emails and phone calls (I answer emails anytime, but I hope office hours will get me back on track with the ones I procrastinate on).  I will publish them here and am perfectly willing to give you a call to answer questions from anyone and everyone - client or not.

I love answering questions - it keeps me smart.

Big caveat - if you aren't a client, the answers are free, and you get what you pay for.  I make no guarantees, and answering your question in no way establishes a preparer-client relationship as defined by any IRS regulations.  It's just a tax guy answering questions for a friend.
Also, I don't work for my employer off-season, so everything I'm doing at this time is outside of our normal in-office relationship.  Again, friend to friend.  I will be back in the same office every year unless something goes to hell in a bucket so you'll see me there as usual.

So if you want to ask a question, feel free to email me at taxadvisor@email.com
I prefer to handle it all via email, but if you think a conversation is in order, go ahead and ask me to call you within one of the office hour windows.
I will do this for as long as the volume of questions allows (after Jan 2nd I will be in regular office).
I will update the dates as I set time aside.

If you ask me a question via email, I WILL add you to my email list.  I email when I publish a new book, and when something BIG happens that people need to know about.  I don't send a lot of emails and you can unsubscribe using a link in the email.

Tuesday 5/8 2 to 5 pm
Thursday 5/10 2 to 5 pm

And buy my books:

Kirk's Amazon Author Page

Wednesday, March 28, 2018

Solar Credits and Solar Sales People

There is currently a great Federal Credit for Solar panels.  You basically get 30% of the cost of a system back as a tax credit.  Some states have a credit as well: MA gives you up to $1000 and SC gives you 25% of the cost as a couple examples.


Solar sellers take advantage of this to help them sell systems, often without disclosing incredibly important details about the credits.  Some do this because they don't know, others do it intentionally.


I prepare taxes in South Carolina, so I'm going to give an example based on a recent client to illustrate the problem:


The client had a Proposal for a system, about $30,000.  It then listed the Federal Credit of $9000, then the SC credit of $7500 and the Net System Cost of $13,500.*  Here's the problem: Once your taxes get to zero, you have to wait until the next year to get the rest of the Federal Credit - sometimes even longer.  Some people will NEVER get the full credit.  Worse, SC only lets you eliminate HALF of your tax liability with the credit.  This client, due to age and income, has ZERO SC tax liability and will NEVER get ANY of the $7500 the salesman claimed.  Luckily he'll get the Federal in 2 years.


Worse yet, many companies sell a loan with a very attractive rate, but a balloon payment equal to the Federal and/or State credit due in May of the following year.  They say, "Don't worry, you'll have the credit on your refund to pay it!"  But you run out of tax liability, and you can't make the payment, so your interest rate SKYROCKETS.  Fraud, maybe.  Deceptive, Hell YES.


Be careful.  ALWAYS talk to the person who prepares your taxes so they can analyze how long it is likely to take you to get the full benefit.  NEVER take the word of a salesman on how your taxes will work!


*There was an asterisk to some tiny fine print that said basically that not all homeowners will get the full credit in the first year - nothing about the possibility of not getting the credit.

Saturday, December 30, 2017

What the New Tax Law Didn't Change

Excerpt from The Short Cheap Tax Book for the Trump/GOP Tax Law:

What Didn’t Change

There was a lot of talk, and two passed bills, that went into the conference committee where the final bill language was decided.  Here’s a list of things they talked about, but didn’t change:

Capital Gains tax rates stayed the same
Identification of sold securities unchanged (no forced FIFO)*
No change to education credits
Student loan interest is still deductible
Savings bond interest used for education is still tax-free
Colleges can still provide tax-free education to their employees
Electric vehicle credit wasn’t changed
Employer education expense exclusion is unchanged
No change to MSA deductibility
No change to educator expense deduction**
No change to the sale of personal residence exclusion***
No change to Dependent Care Benefits exclusion
No change to adoption rules
No change to the solar credit
No change to the Credit for Elderly and Disabled
No change to Earned Income Credit
No change to employer-provided housing rules
No change to exempt organizations rules on “politicking”
529 plan money still not usable for homeschool

*There was a proposal to force partial sales of batches of stocks or other assets to be determined based on “First In, First Out” rules, rather than allowing the person selling to specify what shares of stock among a batch were the ones sold.  This was not adopted.

**As will be discussed later, a whole bunch of itemized deductions were eliminated including the employee business expense deduction that teachers often use to deduct expenses above the $250 educator expense deduction.

***I am actually going to briefly cover the rules in a later chapter since people still think they have to buy a new home to make this work – something that was changed over 20 years ago.


****Links to my blog post on the subject for South Carolina

Friday, December 15, 2017

2017 Boomer Deduction Worksheet

I know this worksheet is making you Boomer Dudes a crap ton of money, so share the love and buy my tax books: Kirk Taylor, EA Author Page
For the new tax law, there's The Short Cheap Tax Book for the Trump/GOP Tax Law
I have a LOT more good information for you in The Short Cheap Tax Book for the Military.

You should also check out these blog posts on Military State Rules and the Military Spouses Residency Relief Act.

Military Submariners serving on two crew ballistic missile or guided missile boats are eligible to deduct lodging and other expenses when their "Tax Home" (the sub) is unavailable. Sometimes this is called the FBM Deduction. There are many discussions of what exactly is deductible, but this worksheet will work in most situations and make it easy to determine what amounts to enter on various forms or enter into tax prep software. If you find this worksheet useful, and it saves you money on taxes, consider making a donation.

I will not be able to do the instructions for individual software programs this year.  It simply required too much time and effort, for not a lot of return.  I have had to allocate more of my time to the book. The 2014 instructions will probably work okay:

The new tax law repealed the entire employee business expense category that the Boomer Deduction fell under.  This is the last year for this.

Boomer Deduction Worksheet for Tax Preparation - 2017
Numbers are for entries into software or initial form entries.

(A) Days of Refit assist in 2017 __________
(B) Days of Off Crew in 2017 __________
(C) Distance from Home to Off Crew Bldg __________
(D) Distance from Home to Waterfront __________
(E) Rent (do not include any mortgage info here)*__________
(F) Average Monthly Utilities __________
(G) Do you go home for lunch every day? __________
(H) Number of people (including wife and kids) sharing your residence___________

(I) Total Days with boat unavailable (A) + (B) = _____________
(J) Monthly Housing Costs (E) + (F) = ______________

Form 2106 Computation Worksheet Entries:
(K) Lodging and Incidental Expenses ((I) / 30 x (J))/H = _____________
(L) Laundry and Cleaning Expenses (I) / 7 x $10 = ______________
(M) Meal Expense (I) x Per Diem Rate from Table below = ______________

(N) Business Mileage:
If (G) is NO:
( (A) x (D) x 2 ) + ( (B) x (C) x 2 ) = ______________

If (G) is YES:
( (A) x (D) x 4 ) + ( (B) x (C) x 4 ) = ______________

Per Diem Rates (assumes reasonable distance from base):
Glynn County, GA $64
Other GA Counties around Kings Bay $51
Florida (around Jacksonville) $51
Kitsap County, WA $51
King County, WA $74
Pierce County, WA $64
Other counties look up in IRS Pub 1542 or http://www.gsa.gov/portal/content/104877
*You deduct mortgage interest, taxes and mortgage insurance premiums directly on Schedule A