Wednesday, January 15, 2020

Single and 0 No Longer Exists - The New W-4

If you started a new job, you may have had to fill out a new W-4 this year - and there are BIG changes.


The old W-4 used Single or Married and a number of exemptions to determine your withholding. The new W-4 just uses your filing status, and thus your standard deduction, to determine withholding based on how your income drives you through tax brackets. It's not easy to see, but you essentially get a base withholding amount based on this filing status and income. The W-4 doesn't show this amount, which is why the next part is confusing. You then either stop, and take this withholding, or calculate a dollar amount to add or subtract from this withholding based on your tax situation.


If you have one job, no kids and no deductions, you can essentially just fill out your name, address and filing status and be done, or make a manual adjustment to get a bigger or lower refund.


More complicated situations should be handled using the Tax Estimator at the IRS website (link at end of article). If you want to get it solid, have a paystub handy for every job (including your spouses), and every other source of income handy when doing it. It will use the information input to print out W-4's for all jobs. It will make a withholding adjustment to the highest paying job to account for all the differences from the standard withholding. UPDATE: It appears that the Estimator is no longer preparing W-4's for you, but it still gives the information needed to make adjustments to your W-4.


It seems more complicated, but is actually much easier than last year's, and should be far more accurate than previous year's W-4's.


You should do the estimator early in the year, and repeat it when you change jobs. A checkup in October can be helpful to make sure you are on track.


Here's the link: https://www.irs.gov/individuals/tax-withholding-estimator


Check out my book on the Trump/GOP tax Law, that also has updates for the late 2019 tax law changes: https://www.amazon.com/Short-Cheap-Tax-Book-Trump/dp/1981999914/ref=sr_1_2?keywords=The+short+cheap+tax+book&qid=1579618274&sr=8-2

Tuesday, January 14, 2020

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


Single and 0 No Longer Exist - The New W-4
Late 2019 Changes affecting 2018 Returns
Late 2019 Changes affecting Disaster Areas
The Rest of the Late 2019 Tax Changes (some big ones here)
October Tax Checkup
The $10,000 Question for Students and Parents
My Advice on IRA's
2018 Social Security Warning!
Wants and Needs and Kids
Emergency Fund Advice
Solar Credits and Solar Sales
The Dreaded CP2000 Letter from the IRS
The IRS did NOT Call You!
I Got an E-mail from the IRS!
I Want to Lower my Taxes!
10 Simple Pieces of Tax Advice
10 Things Everybody Should Do
Check Your Withholding

Trump/GOP Tax Law

Post 2018 Tax Season Thoughts on the New Law
Quick Thoughts on the New Tax Law (Post 2017 Tax Season Edition)
2018 Tax Bill Changes
What the New Tax Law Didn't Change (2018)

South Carolina

SC Gas Tax Credit Advice
SC Military Retirement Change (2016)
Obamacare in SC - Something's Fishy

Military

Military Spouses Residency Relief Act 2018 Change
Military Spouses Residency Relief Act Details and Matrix
Retiring from the Military? Tax Warnings!
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
2019 Military State by State Tax Guide
2018 Military State Tax Guide
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

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
Rental Property Guide for Homeowners
Rental Property Sale Worksheet

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
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
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

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

Friday, January 10, 2020

2019 Tax Return Timing

The IRS says it will begin accepting tax returns on January 27th. This is a little bit late, probably due to your Congressman changing the tax laws just before Christmas 2019!


People filing before January 27th can expect their refunds in about 6 to 21 days following the 27th, and later filers 6 to 21 days after their return is accepted (normally within 24 hours of filing if there are no issues.)


One exception are people claiming Earned Income Credit, Additional Child Tax Credit, or the American Opportunity Credit. These returns will not be processed until February 15th. So returns filed before that can expect their refunds 6 to 21 days after the 15th of February.


None of those dates are guaranteed, and simply reflect the IRS' expected refund timing. many things can delay a refund. NEVER count on the money until it hits your wallet!

Thursday, January 2, 2020

2019 Military State by State Tax Guide

State Guidelines for Military (2019 values)

I have a LOT more good information for you in The Short Cheap Tax Book for the Military.

The information here is subject to change as states update their information.  I will update at least weekly until mid January, so please check back just before you file.  The primary purpose of this is discussing the taxation of active duty pay, but I have mentioned retired pay for some states when I found the answer easily, but just because I don't mention pensions doesn't really tell you anything.

States with changes for 2019: CA (just an update of their evil letters to military).

Military Spouses Residency Relief Act (MSRRA)
Most states have begun to treat this in a similar manner to each other. In general, the spouse of a service member has two choices for state of residency: the state they are stationed in, or the military member's state of residency. In order to claim the military members state, they must have established a domicile in that state at some time before moving to the current state. For those qualified to make the election to claim the military members state, it is important to weigh the benefits properly, for example, a spouse who works in SC married to a military resident of MI might assume that since MI does not tax the military member that they should choose this state. This would be wrong because MI will tax the non-military income of the spouse. SC is far more generous to the spouse of a service member stationed in SC. Expert assistance may be required making this determination. It can also be difficult to get the current state to stop withholding from the spouses wages. Each state Dept of Revenue has different procedures for handling this.

MAJOR UPDATE: Starting in 2018, spouses do NOT have to establish residency in order to claim the service member's state of residency!

An added twist to this is that some states, like Maine, New Jersey and New York, have a way for residents not living in the state to claim non-residency for tax purposes.  Our best minds conclude that this would allow a military spouse claiming one of these states as their state of residency could claim non-resident status and not have to pay taxes to the state.  This has not been fought or litigated to my knowledge, so it would be wise to be aware that some states might fight it.  My advice is always to go the aggressive route, but see what the difference is going the other way, and be prepared if the state fights this later.  I personally set aside the excess refund for three years, and then spend it :)

Residency
A military member normally retains residency in the state they resided in when they joined the military unless action is taken to change this. The W-2 can generally be relied upon as to the state of residence of the military member. The states in which a service member are stationed will not tax the members military income unless they are residents. They will tax any income earned from other employment or business activities conducted in the state by the member and their spouses (subject to the MSRRA discussed above.) The discussions below talk about the taxation of military income for residents of the respective state.

Filing Requirements:
Not having to file discussed below assumes there is no withholding from the given state. A member may file even if not required and should do so if they have withholding from the given state so they can get the money back. If a member would not be required to file except for the existence of withholding, they should adjust their state withholding through MyPay so no taxes are withheld from that state. They may also consider stopping withholding even if they are required to file, for states that do not tax their income (MI for example.) Many people do not file required tax returns when there is no refund or balance due. This could result in a letter from the state requesting a return but rarely any penalties – but there can be!

Death Benefits:
Many states exclude death benefits and military pay for service members killed in a combat zone or while on active duty. The specifics are not discussed here. Survivors of service members killed on active duty can obtain assistance for this from CACO personnel.

States with Blue names either require a tax return or other document to be filed by military residents, or a tax return should be prepared to determine if any refundable benefits are available from that state. 

Alabama:
Alabama treats military residents the same as all other residents.  Alabama does not tax military retirement.

Alaska:
Alaska does not have an income tax. Alaska Permanent Funds Dividends are taxable on the Federal Return.

Arizona:
Arizona does not tax active duty military pay, and does not require filing if the only AZ source income is active duty pay.

Arkansas:
Beginning in 2014, Arkansas no longer taxes active duty military pay.  A tax return is still required.

California:
California does not tax military pay of CA residents stationed outside of the state of CA. They do tax military income of their residents when stationed in CA. They also treat military spouses generously, similar to SC. Form 540NR is used to account for this. You write “MPA” to the left of column A for non-resident military income and enter the military income in column B but exclude it from column E. California has been sending letters to military members who meet the requirements for not having to file a tax return claiming they are required to file them. These letters are wrong and easy to respond to. CA should know they are wrong but I guess they are desperate for money. Don't fall for it. There is a place for military to respond on the back of the response form. RESPOND!

Colorado:
Beginning in 2016, CO will not tax active military income of military members with a home of record of Colorado IF AND ONLY IF, their home of record was Colorado when they joined, they changed to another state during service, and then changed back to CO.  Otherwise, Colorado taxes military residents the same as other residents unless the member was stationed outside the US for >305 days in the year. Colorado taxes military retirement the same as other retirement, with a partial exemption that starts at age 55 and gets slightly bigger at age 65.

Connecticut:
Connecticut allows resident military personnel stationed outside of CT to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in CT for the entire year (a parents house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of CT for the entire year. 3) Spend no more than 30 days in CT for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other CT source income.
Starting in 2015, military pensions are not taxed by CT.

Delaware:
DE taxes military residents the same as all other residents. Delaware has a small military retirement pay exemption that gets bigger at age 65.

Washington DC:
DC taxes resident military personnel the same as all other residents.

Florida:
Florida does not have an income tax.

Georgia:
GA taxes military residents the same as all other residents however Reserves or National Guard called to active duty for more than 90 days may be able to take a credit against their individual income tax based on their income from the National Guard or Reserves.

Hawaii:
Hawaii taxes military residents the same as all other residents except that they do not tax the first $6076 of reserve pay or HI national guard pay. Military retirement pay is not taxed in HI.

Idaho:
ID residents stationed in ID pay taxes on all military income; however, if the member was on active duty >120 days and stationed outside of Idaho they can exclude any military income earned while stationed outside of ID. If they are stationed outside of Idaho the entire year they do not need to file an ID tax return, however Idaho has a Grocery Credit that a military member is eligible for that is refundable so it is possible to get a refund from Idaho even though their was no tax withheld.  This makes Idaho one of the States that a military member should file even when not required to. Retirement is tax free when over 65 (and possibly younger under certain conditions).

Illinois:
IL does not tax military pay; however, the member must file a tax return if they file a Federal return. Military members with children who get Federal Earned Income Credit may get up to 10% of the Federal amount even if they have no taxes due to IL. Illinois does not tax military retirement.

Indiana:
Indiana taxes military income but allows a deduction of the first $5,000 of military income for the taxpayer and/or the spouse ($10,000 for military couple.) If a military member changes state of residency to another state they must submit the DD Form 2058 with the tax return for the year they changed state of residency.  If you were active military and you and your spouse did not live in Indiana the entire year you do not owe county tax.  Use "00" as your county.  If your spouse remained in Indiana you BOTH owe county tax to the county he/she lives in.  Don't try to take the real estate tax deduction on property that's not in Indiana. Indiana has a small deduction for military retirement.

Iowa:
IA does not tax military income and military income is not used in determining filing requirements (if the only significant sources of income are military income, a tax return is not required.) Starting in 2014, Iowa no longer taxes military retirement.

Kansas:
Kansas taxes military income but allows a deduction for recruitment, sign-up and retention bonuses paid that are included in Federal taxable income (if the bonus was tax free to federal do not deduct it from KS. Kansas starts with Federal AGI so it is already excluded.)  The subtraction is made on Adjustments line A21. Kansas does not tax military retirement pay.

Kentucky:
KY does not tax military income and does not require a tax return if the only KY source income is military pay.

Louisiana:
Louisiana requires a tax return from military personnel the same as any other resident; however, LA gives an exclusion of up to $30000 of military pay if the person has been on active duty outside of Louisiana for at least 120 days during the tax year. The subtraction is taken as a Schedule E subtraction, Code 10E, by entering military pay up to $30000 on the schedule. Louisiana has a small retirement pay exclusion.

Maine:
Maine allows resident military personnel stationed outside of ME to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in ME for the entire year (a parents house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of ME for the entire year. 3) Spend no more than 30 days in ME for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other ME source income. Maine calls this the General Safe Harbor Rule.  Maine no longer taxes military pensions as of 2016 but only that received by the service member. Ex-spouses receiving retirement pay based on the service member's time served must pay taxes on it.

Maryland:
Maryland taxes military residents just like other residents; however, they allow a subtraction for up to $15,000 of military pay earned outside of the U.S. (Military Overseas Income.) The deduction phases out dollar for dollar as ALL military income goes above $15,000 and there is no exclusion if the total military income exceeds $30,000. The subtraction is taken on Form 502SU and the Military Overseas Income Worksheet is used to calculate the deduction.  MD has county taxes you cannot avoid.  If you are stationed outside of MD and married to a non MD spouse, software makes it very difficult to allocate things properly.  You can exclude the non-MD income, but also need to pro-rate the deductions based on income - good luck with this - MD will catch you if you don't do it.

Massachusetts:
There are no special tax benefits for military, however, the Massachusetts Dept of Veterans Affairs will give a one time payment of $500 to any resident after they served at least 6 months active duty in the military. They also have a $1000 benefit for personnel who serve in Iraq or Afghanistan.
http://www.mass.gov/veterans/benefits-and-services/bonus/bonuses-only/
Massachusetts does not tax military retirement.

Michigan:
Michigan requires military members to file a tax return; however, they subtract active duty pay from income (Schedule 1, Line 11). Military members with children who receive Earned Income Credit on their Federal return may collect 6% of the federal amount, even if they pay no taxes to MI. (This was 20% for 2011 and prior years.)  Michigan does not tax military retirement.

Minnesota:
Minnesota subtracts Active Duty Military pay from income of MN residents. If Gross Income on Federal return other than military is less than $10,000, no MN return is required.
Minnesota pays $120 per month a military resident spends in a combat zone. This is paid separately from the tax return and is claimed on Minnesota form M99

Mississippi:
Mississippi taxes military residents the same as other residents except that they do not tax National Guard and Reserve pay up to $15000. Mississippi does not tax military retirement.

Missouri:
MO allows resident military personnel stationed outside of MO to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in MO for the entire year (a parent's house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of MO for the entire year. 3) Spend no more than 30 days in MO for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other MO source income. If your spouse works but claims MO as your state of residency through the MSRRA their income is taxable to MO and must file a tax return if they earn more than $1200. As of 2014, Missouri exempts 75% of military retirement income from tax and starting in 2016 all military retirement income will be tax exempt.  Starting in 2016, MO is allowing you to subtract your military pay, so you don't have to file as a non resident.

Montana
Montana requires military residents to file a tax return but exempts active military pay from taxation on Schedule 2, Line 8. Verification of active duty status must be attached to the return.  National Guard pay is tax exempt.

Nebraska:
Nebraska taxes military residents just like other residents. Nebraska has implemented an incredibly complicated option to exclude certain amounts of military retirement income for some years.  It's too stupid to attempt to explain, but if you are retiring or retired from the military in Nebraska you should read this immediately:
http://www.revenue.nebraska.gov/info/military_benefits.html 

Nevada:
Nevada does not have an income tax.

New Hampshire:
NH does not have an income tax but they do tax interest and dividends. Generally, these would need to exceed $2400 for an individual and $4800 for a couple.  New Hampshire has a $100 bonus for military members who get the Global War on Terrorism Medal. Not sure about expiration, but details are at: https://www.nh.gov/nhveterans/benefits/bonuses.htm

New Jersey:
NJ allows resident military personnel stationed outside of NJ to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in NJ for the entire year (a parent's house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of NJ for the entire year. 3) Spend no more than 30 days in NJ for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other NJ source income.(NJ does not consider barracks maintaining a permanent place of abode outside NJ)
New Jersey just passed a $3,000 exemption for honorably discharged Veterans which applies to tax years 2016 and beyond.

New Mexico:
New Mexico does not tax active duty military pay however; NM residents are required to file a NM return if they were required to file a Federal return.

New York:
NY allows resident military personnel stationed outside of NY to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in NY for the entire year (a parents house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of NY for the entire year. 3) Spend no more than 30 days in NY for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other NY source income. NY specifically excludes barracks as an abode outside of NY for the purpose of this rule. Also, if a NY return is required to be filed to get back state taxes withheld and this exemption results in zero income (as it usually does) the return may have to be mailed in vice electronically filed.  NY does not tax military pensions.

North Carolina:
NC taxes military residents the same as other residents.

North Dakota:
ND taxes military residents the same as other residents, however, National Guard and reserve members called to active duty can exclude their active duty pay form ND income.

Ohio:
Ohio does not tax military pay of OH residents stationed outside of the state of OH. They do tax military income of their residents when stationed in OH. Ohio does not tax military retirement pay.  Ohio will give up to $1500 for military service ($500 for any service, $1000 for certain countries and $1500 for combat zones). Details here: https://veteransbonus.ohio.gov/odvs_web/

Oklahoma:
Oklahoma allows military members to exclude active duty pay. This exclusion is accomplished using Schedule 511-C. Military members are required to file an OK tax return if they were required to file a federal return.

Oregon:
Oregon allows a subtraction of all military pay earned while stationed outside of OR and up to $6000 earned while stationed in Oregon (Subtraction Code 319). OR also allows military residents to be treated as non residence if they spent less than 31 days in OR, did not have an abode in OR and had a permanent abode outside OR the entire year.

Pennsylvania:
Pennsylvania does not tax Active Duty Military Income of residents stationed outside of PA and does not require a tax return; however, they do require the service member to mail or fax a copy of their orders stationing them outside of PA and their W-2. If filing a tax return a copy of the orders must be included when mailing the return, or sent separately to the address below.
PA DEPT OF REVENUE
NO PAYMENT OR NO REFUND
2 REVENUE PLACE
HARRISBURG PA 17129-0002
May also be faxed to: (717) 772-4193
Starting in 2016, PA exempts military pay from LOCAL taxes, regardless of where you are stationed.

Rhode Island:
Rhode Island taxes military residents the same as other residents.

South Carolina:
SC taxes military residents just like regular residents except that it does not tax reservist drill pay. SC is very generous to the spouses of military (residents of another state) in that they allow you to exclude the active duty income of the non-resident military member from the calculation of what percentage of deductions to allocate to the spouse. This generally results in 100% of the deductions against only the spouses SC income. It is very difficult to get tax software to handle this correctly. Line 1 of the SCNR should have no active duty military income in the Federal column. SC is phasing in a larger deduction for military retirees.

South Dakota:
SD does not have an income tax. SD will pay military members $500 for service after 9/11/2001. Details here: https://vetaffairs.sd.gov/benefits/State/Veterans%20Bonus.aspx

Tennessee:
TN does not have an income tax but they do tax interest and dividends. Generally, these would need to exceed $1250 for an individual and $2500 for a couple.

Texas:
Texas does not have an income tax.

Utah:
Utah taxes resident service members the same as other residents.

Vermont:
Vermont does not tax military pay of VT residents stationed outside of the state of VT. They do tax military income of their residents when stationed in VT. Military pay is subtracted on line 32. A tax return is not required if the only income is military pay while stationed outside VT. 

Virginia:
Virginia taxes military residents just like other residents except that they give a subtraction of basic military pay of up to $15000. The subtraction phases out dollar for dollar as income goes from $15000 to $30000 and is completely gone at $30000 of income. (If a military member made less than $15000, it would all be subtracted. If they made $20000, they get to subtract $10000.) The subtraction code is 38.

Washington:
Washington does not have an income tax.

West Virginia:
West Virginia taxes military residents unless they spent less than 30 days in WV. In this case they file as a non-resident. WV does not tax military income of reserves or national guard called to active duty by Executive Order of the President.  Starting in 2017, West Virginia no longer taxes Military Retirement pay. WV gives a bonus of $400 for military service ($600 for combat zones). Details here: https://veterans.wv.gov/Pages/VeteransBonus.aspx

Wisconsin:
Wisconsin taxes military residents the same as other residents except that they do not tax military pay of reserves or national guard called to active duty. Rent paid by the military member in a state other than WI is allowed to be used for the School Property Tax Credit (not military housing.) If a military member is stationed outside the United States, they may take a credit of up to $300 for pay received while stationed outside the U.S.  Wisconsin does not tax military retirement.

Wyoming:
WY does not have an income tax.

Feel free to send questions to Kirk at taxadvisor@email.com

I am available to prepare taxes via mail, e-mail, fax and online approval. No fees are charged until the return is complete and you are 100% satisfied. If the fees are too high, refund too low, or we determine that a cheaper filing method is appropriate, I will return all materials and charge no fees.

I will check any individual tax return from 2016, 2017, 2018 or 2019 for free. If I find an error, I will offer to fix it for a fee if desired

I have made every effort to ensure the above information is 100% accurate, but I am human and the various governments love to change the rules. If you think something is wrong please inform me via e-mail at taxadvisor@email.com

Monday, December 30, 2019

2019 Tax Law Change - Disaster Area Provisions

Congress slipped a significant number of tax law changes into their budget bills this December. Many of those extended the Trump/GOP tax law disaster provisions that were meant to only apply to a few years. Essentially, all Presidentially declared disasters since the older law was passed either follow the rules of the Trump Law, or have specific bills passed to cover them. There are also some nice new provisions tossed in as well. I will not differentiate which are new and which are just extensions and instead will just cover what applies and when.

This post is not comprehensive or in full detail. I have tried to include and explain to the maximum extent necessary for the average taxpayer. If this post leads you to think you can use the benefits, you should talk to a tax pro or research the actual law. For the love of all that is holy, do NOT rely on your software to get this right. I use some of the best tax software in the world for my clients and I will be watching it like a hawk to make sure it gets this right. I have not included provisions that only apply to good sized businesses or employers.

To determine if your disaster qualifies, you go to the FEMA website HERE and search for "Major Disaster Declaration" under Declaration Type and narrow it with your state. I included the SC Dorian page HERE so you can see the map. If you are in the orange area, most of the rules apply to you. A few more esoteric rules require you to be in a red area (not applicable to Dorian in SC). The disaster declaration must have been made between Jan 1st, 2018 and Feb 18th, 2020 and the disaster must have started before December 20th, 2019. These dates are on the FEMA pages.

Once you know the disaster applies to you, you can see what tax benefits you have. There are retirement account benefits, deductions, Child Tax Credit (EITC and ACTC) benefits, filing deadline extensions and charitable deduction provisions. The charity provisions apply to everyone who donates to the disasters, not just those affected by them.

Retirement Provisions: These generally require you to have suffered an economic loss as a result of the disaster, though it doesn't seem that the limits are tied to the amount of loss. Simply put, you would need losses that were not reimbursed by insurance - but check with your tax dude to confirm you qualify before futzing with your retirement accounts. I'm going to use 401k here, but I mean all the 403b, Thrift Savings Plan, 457 etc. deferred compensation type plans.

1. You can avoid the 10% penalty on an early 401k or IRA withdrawal. The max is $100,000 per disaster. The withdrawal must be made after the disaster began and June 17th, 2020. You still have to pay taxes on the withdrawal but...
2. You can spread the taxes over three years starting with the year you took it out. Or...
3. You can put the money back within 3 years of the distribution date and owe no taxes.
4. If you took advantage of the $10,000 first time home buyer exclusion but the disaster prevents you from buying or building the home, you can put the money back tax and penalty free. The withdrawal must have been made within 180 days before the disaster and 30 days after it ended. The money must be put back before June 17th, 2020.
5. The 401k loan allowed amount was doubled to $100,000. Payments due between the start of the disaster and 180 days after may be delayed until June 17th, 2020.

Disaster Loss Deduction:

The rules for a disaster loss deduction are modified to eliminate the 10% floor and to allow the deduction to be taken even if you do not itemize. Basically, you take your losses, subtract any insurance reimbursement, subtract $500 (the new floor) and that's the amount deducted. If you itemize, just include it as an itemized deduction. If you don't, add it to your standard deduction. Make sure your software or tax pro handles this right.

Very rough, even number example: Say your standard deduction is $12,000 and your house has $10,000 in damage done. Insurance reimburses $5000. So your deduction is $10,000 minus $5000, minus $500 which equals $4,500. If you take the standard deduction, it would now be $16,500. If you had $15,000 in itemized deductions, the disaster loss would now make them $19,500. I'm not sure if you are allowed to game the system if you were at $11,000 in itemized deductions before itemizing, meaning the total would be $15,500 with the casualty loss, by taking the standard deduction and adding $4,500 to it to get $16,500. I need to dig deeper and see the forms and regulations.

Earned Income Credit and Additional Child Tax Credit:

Here's where things get really weird. If your principal abode was in the disaster area, or you were displaced due to the disaster (these are weird so ask a pro if your home wasn't in the zone) and your earned income went DOWN, you can use the prior year's earned income in these calculations if it works out better. You basically have to run the numbers to see if it's better. You can do this for any year that falls within the disaster dates. You have to use the prior year's income for BOTH credits or neither.

For Married Filing Jointly, only one spouse needs to be affected, but you have to use BOTH spouses' income from the prior year for the calculation.

I can't see anything requiring the disaster to be the CAUSE of the reduced income.

Filing Deadline Extension:

You get a 60 day extension of any filing deadline that falls between the start and end of the disaster. The 60 days starts after the disaster is over. It applies to IRA contribution deadlines as well. It only applies to disasters occurring AFTER December 20th, 2019.

Charitable Contributions:

This will likely not apply to very many people, BUT, if you contribute to a qualified charity benefiting one of the disasters between Jan 1st, 2018 and Feb 18th, 2020, in cash (credit and checks as well, just not goods) you can exceed the 60% of AGI limit normally applied to charitable deductions. That's right, if you already donated 60% of your income to charity, you can donate more if it goes to benefit these disasters.

2019 Late Year Tax Changes

When Congress passed the budget late in the year, they threw in some Easter Eggs for taxpayers. Most of the changes were pretty good for us, but there was one I didn't like...though it only applies if you inherit a retirement account. The act reinstated some tax benefits, affected disaster areas and made major changes to retirement accounts and education savings plans (529's).

This post is based on a very early reading of the act, so there may be some points or subtleties missed...

The acts extended a few tax provisions, and carried some back in to 2018, so you need to look at your 2018 tax return in some situations to see if you can get more money. The big reasons to look back would be if you have education expenses, put in energy efficient heating and air systems, had your house foreclosed, or paid mortgage insurance.

Here's a non-comprehensive list of the extended provisions, with inclusion and level of detail based on the likelihood the average taxpayer would be affected by them:

1. If you had cancelled debt as a result of debt secured by your personal residence, you can exclude the cancelled debt from income. This goes back to 2018, so if you included it in that year, you can amend to remove it.
2. The Tuition and Fees Deduction was reinstated retroactive to 2018. This allows you to deduct up to $4000 of qualified education expenses off of your Adjusted Gross Income (AGI). You don't need to itemize deductions to take it. Usually education expenses are used for the two great tax credits, but this deduction can be good if you can't use the credits, or are subject to a high state tax rate.
3. The $500 credit for heating and air systems that were very energy efficient has been revived for 2018 and forward.
4. Mortgage Insurance Premiums were made deductible for 2018 and later. This includes VA and FHA Funding Fees. There is an income limit and it requires itemizing.
5. The threshold for deducting medical expenses remains at 7.5% vice 10% as was planned.
6. Electric and alternate fuel vehicle credits, as well as charging station credits were extended.

The vast majority of the rest are unlikely to apply to you unless you have a decent sized and complicated business.

Disaster Area provisions: I'm not going to go over these much at all except to state that if you were subject to a disaster as declared by the President, then you should seek some professional help or do some detailed research. There are a TON of these and they can be complicated.

Retirement and 529 provisions: Again, non-comprehensive and description limited based on breadth of applicability.

1. Starting in 2020 you can contribute to Traditional IRA's even if you are older than 70 and a half. They must be 2020 and later contributions, so you can't contribute for 2019 even if it is 2020.
2. For people not already required to make Required Minimum Distributions, the age has been raised from 70 and a half to 72.
3. A new exception to the 10% penalty for early retirement account withdrawals was created for 2020 and later. You can exclude the penalty on up to $5000 withdrawn within one year of the birth or adoption of a child.
4. You can use up to $10,000 from a 529 plan to pay student loans without penalty or inclusion in income. You can't deduct student loan interest paid this way.
5. Requirements to contribute to IRA's and 401k's have been relaxed. These include redefining income for graduate students, allowing part time workers to contribute to 401k's, and making difficulty of care payments eligible compensation for IRA's.

And the bad stuff:

1. The Kiddie Tax rates have reverted to it's pre-Trump Tax Reform status.
2. IRA's inherited in 2020 and later by non-spouses need to be withdrawn within 10 years. There are a few exceptions for minors and the disabled.

Sunday, December 29, 2019

Take a Second Look at Your 2018 Tax Return If...

Your house was foreclosed...

The exclusion of cancelled debt from a principal residence from income was reinstated for 2018.

You Paid Mortgage insurance...

The deduction was reinstated for 2018.
This includes FHA and VA funding fees.

You had education expenses...

The Tuition and fees deduction was reinstated for 2018.
This likely applies to very few people, but you should double check...