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New Opportunities Under Tax Cuts and Jobs Act

hoffmanAs you are likely aware, Congress has passed and President Trump has signed into law the Tax Cuts and Jobs Act, effective January 1, 2018. Although continued study of the new provisions will undoubtedly reveal additional opportunities that we can share with you and your family, we wanted to provide some of our immediate impressions so you can get a head start on tax planning for 2018.

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2017 Year-End Tax Planning: Personal Tax Consideration and New Legislation

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The Tax Cuts and Jobs Act of 2017 has key changes that will have a major impact on your future tax returns and planning going forward. Below we have listed some of the more substantial changes, compared other notable areas to the current law and provided some year-end tax planning recommendations.

Individual Tax Changes:

Personal Exemptions and Standard Deduction.  The bill eliminates the deductions for personal exemptions and also nearly doubles the standard deduction. The current personal exemption for 2017 is $4,050 (and begins to phase out at AGIs of $261,500 for single taxpayers and $313,800 for married taxpayers). The current standard deduction is $6,350 ($12,700 for married taxpayers) for 2017. The compromise bill proposes increasing the standard deduction to $12,000 for single taxpayers and $24,000 for married taxpayers.

State and Local Tax Deductions. The deductions for property, and state income or sales tax, which are currently fully deductible, are eliminated under the bill and are limited to a collective cap of $10,000.

Itemized Deductions. Both plans eliminate the Pease limitation, which limits the amount of itemized deductions certain higher income individuals can take, which will benefit many taxpayers.

Medical Deductions. A short-term reduction to the medical expense deduction threshold reduces the current 10% of expenses above AGI down to 7.5% for the next two years.

2018 Tax Rates:

 

Rate Joint Return Individual Return
10% $0 – $19,050 $0 – $9,525
12% $19,050 – $77,400 $9,525 – $38,700
22% $77,400 – $165,000 $38,700 – $82,500
24% $165,000 – $315,000 $82,500 – $157,500
32% $315,000 – $400,000 $157,500 – $200,00
35% $400,000 – $600,000 $200,000 – $500,000
37% Over $600,000 Over $500,000

Business Tax Changes:

Carried Interest. Individuals that earn partnership interest for performing services have historically received long-term capital gain treatment when they ultimately sell that interest. The bill would impose a three-year holding period of that partnership interest, instead of the current one-year holding period, before individuals could receive the benefit of the long-term capital gain tax rates.

Pass-Through Businesses. Currently, owners of partnerships, S corporations, and sole proprietors that have “pass through” income pay tax on that income at their personal income tax rates. The bill would continue taxing that income at personal income tax rates but would allow for a 20% deduction on their income (similar to how self-employed tax is currently handled). However, the 20% deduction would be prohibited for anyone in certain service businesses unless their taxable income is less than $315,000 if married ($157,500 if single). There are other proposed limitations on pass-through businesses and we will distribute that information as it becomes available.

Corporations. The Federal Corporate tax rate is currently 35% and the proposed compromise would enact an immediate AND permanent rate reduction to 21%.

Year-End Recommendations:

Saving Money and Situational Strategy

Our normal year end advice about accelerating deductions and deferring income has increased importance in 2017. As the tax rates will be lower in 2018, consideration should be given to deferring income into next year where possible. It seems clear that state and local, as well as, real estate tax deductions will be decreased in 2018 with the new law. Consider making 2017 Georgia resident income tax payments by the end of the year. This may be beneficial even if you are subject to AMT, as Georgia residents will get a 6% benefit for tax paid in 2017 that they may lose if the payment is made in 2018. Additionally, if you expect to be in a lower tax bracket it may be worthwhile to consider a Roth conversion. See below for additional annual reminders.

General Annual Maintenance

Harvest Gains and Losses – As usual, we recommend harvesting losses (in non-retirement accounts) to offset any gains. And harvesting gains if it is likely you will have low or possibly negative taxable income consequently incurring little or no tax on your gains.

Gifts – Remember to make your annual exclusion gifts.

Required Minimum Distributions (RMD) – There is a December 31st deadline for those that are over the age of 70 ½ or have inherited an IRA to take a minimum distribution. Please note that there is a penalty for failing to take a RMD.

Retirement Plans – Remember to make your contribution to employer sponsored retirement plans BEFORE the end of the year. IRA and SEP contributions can be made up UNTIL April 17, 2018.

Education Expenses – DO NOT forget reimbursements from 529 plans for 2017 tuition expenses. The reimbursement MUST be paid in the year the expense was incurred.

Other Notable Areas Where the New Bill and the Current Tax Code Differ:

 

INDIVIDUAL
TAX AREA
CURRENT LAW COMPROMISED BILL PROPOSAL
Individual Tax Rates Seven tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, & 39.6% Seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% & 37%
Individual Alternative Minimum Tax (AMT) Exemptions phaseout at $70,300 for individuals and $109,400 for married taxpayers filing joint tax returns Raises exemptions to $500,000 for individuals and $1,000,000 for married taxpayers filing joint tax returns
Child Tax Credit $1,000 Per Child $2,000 Per Child
Affordable Care Act (ACA) Individual Mandate 3.8% Net Investment Income Tax, individual mandate tax penalty and .9% Payroll Tax Repeals Individual Mandate tax penalty
Mortgage Interest Deduction The cap for the current mortgage interest deduction is $1 million Keeps current mortgage interest deduction but caps the deduction at $750,000 for new loans.
Estate Tax 40% tax on assets over $5.49 million per individual for 2017 Doubles the $5.6M estate tax exemption to $11.2 Million ($22.4 per married couple)

Conclusion:

Taxes are complex and every taxpayer has their own unique financial identity. You should always be reviewing tax strategies but it is important to remember that every tax tip you get or article you read may not apply to your personal situation. Because of that we are here to help you with any concerns you have or questions you may need answered.  Please contact us at 404-255-7400 or info@hoffmanestatelaw.com with questions or concerns about this bill.

Bitcoin (and Other Cryptocurrency!) Taxation

IAN M. FISHERUnless you’ve been living under a rock, you’ve probably heard about Bitcoin and how more and more people are jumping into it. But what is a Bitcoin? What is cryptocurrency? And more importantly for our purposes, how is it all taxed?

Bitcoin is a form of virtual currency that is created, traded, and often stored online. It’s decentralized, so no country or person controls all of the Bitcoin. Some companies have started accepting payment in Bitcoin including Overstock.com, Microsoft, Paypal and Tesla. Bitcoin is itself a type of cryptocurrency, which encompasses hundreds of other different digital currencies. Bitcoin, and many other coins, run on blockchain technology, which is essentially a digital ledger of all of the bitcoin transactions. Many online sites let you purchase Bitcoin and other cryptocurrency for US Dollars, and many exchanges let you exchange cryptocurrency coins for other different coins, which may include Litecoin, Ethereum and many others.

But we’re not technology lawyers here at Hoffman & Associates, we’re tax lawyers. How do these millions of dollars of Bitcoin profits get taxed?

The IRS gave us some guidance with Notice 2014-21, in which they described some of the basic tax principles of cryptocurrency. The IRS refers to cryptocurrency as “virtual currency,” and treats it as “property,” which means the IRS does not allow it to be taxed as foreign currency, since it is not legal tender.

What this means is that cryptocurrency gains are taxed somewhat similarly to stock. There will be no tax on any gain or loss until a recognition event occurs. If the cryptocurrency is held for less than a year, short-term capital gains rates will apply (the same rate as ordinary income tax rates.) However, if the cryptocurrency is held for longer than a year, the gain or loss will be taxed at a lower rate, which is 15% for all but the highest earners, who pay 20%.

To be clear, not all cryptocurrency tax circumstances will qualify for the lower long term capital gains rate. For example, if you are paid wages from work in cryptocurrency, that income will still be ordinary income. If someone “mines” the cryptocurrency, which means uses their computer to solve complex math problems to receive cryptocurrency, that income will also be treated as ordinary income.

Currently, a lot of the smaller cryptocurrency coins (called “altcoins”), cannot be purchased with US dollars, so one would have to buy a more popular coin with US dollars, then use an exchange to buy the altcoins. For example, someone may buy one Bitcoin and a few weeks later, after it has appreciated, exchange it for a certain amount of another coin.

Although many taxpayers may expect this to be a non-taxable transaction since they never cashed out to US dollars, it’s likely that the IRS would not agree. Although the IRS has never specifically ruled on the taxation of such a transaction, most practitioners believe it is clear that such a transaction is taxable.

The section of the Internal Revenue Code that would possibly allow for deferral of tax is IRC Sec. 1031, which allows for deferral of taxes when like-kind property is exchanged for other like-kind property to be held in a trade or business or for investment.

For example, if a taxpayer swaps one piece of investment real property for another with the same value, there will be no tax on that transfer, even if the value of the property at the time of the swap is higher than the taxpayer’s basis in the property.

However, IRC Sec. 1031(a)(2) does not allow the like-kind tax deferral to be applied to stocks, bonds, notes, or securities. It is very likely that the IRS will treat cryptocurrency similarly.

Even a purchase using cryptocurrency will trigger a tax event, which has the potential to complicate the use of cryptocurrency as currency forever. Who would want to buy something small online if they’d have to keep track of the tax consequences?

In the next cryptocurrency tax article, we will discuss current and proposed legislation and cases related to the taxation of cryptocurrency.

Should you have any cryptocurrency tax questions, do not hesitate to contact us at 404-255-7400 or hoffmanestatelaw.com.

Rural Hospital Organization Expense Tax Credit

about-us-imageIn 2016, the Georgia legislature adopted a state income tax credit effective January 1, 2017 designed to enourage Georgian’s to contribute to qualified rural hospital organizations.

Participation in the Rural Hospital Organization (RHO) expense tax credit program is limited to Georgia rural hospitals that meet qualification criteria established in the law.  The maximum contribution permitted is $5,000 per individual, $10,000 for married couples.  90% of the contribution  qualifies for an offsetting tax credit.  A C Corpration or Trust may receive a 90% tax credt on conribution, up to a limit of 75% of the entitiy’s Georgia income tax liability.  Owners of pass-through entities, such as S corporations, limited laibility companies (that have not elected to be taxed as C corporations), or partnerships are not eligible and partners and shareholders of such entities are limited to the tax credit maximums that apply to their status as individual or married taxpayers.    For those taxpayers that itemize on their federal income tax return, the RHO contribution might also offer an additional tax benefit of a federal income tax charitable deduction.   If you would like more information on the Georgia Rural Hospital Tax Credit, please contact us at 404-255 7400 or email us at info@hoffmanestatelaw.com.

 

IRS Fact Sheet FS-2017-9: Worker Classification

Joe Nagel Website PictureIRS Fact Sheet 2017-9 provides a good reminder to employers that they must be careful in identifying workers as employees and independent contractors. If employees are misclassified as independent contractors, the employer may be responsible for payroll taxes. The FSA provides a list of factors used to discern whether a worker is an employee versus an independent contractor.

Even if the employer incorrectly classifies workers, documentation that supports the employer’s filing position is important.

An employer that has a reasonable basis for classifying its workers as independent contractors may be able to obtain special relief under section 530 of the Revenue Act of 1978 (P.L. 95-600). The IRS also has a Voluntary Classification Settlement Program that provides an opportunity to reclassify workers as employees for future tax periods, with partial relief from federal employment taxes.

If you have questions or need help regarding a misclassification of workers, we can help. Please contact us at 404-255-7400 or info@hoffmanestatelaw.com.

Understanding Employee vs. Contractor Designation
The Internal Revenue Service reminds small businesses of the importance of understanding and correctly applying the rules for classifying a worker as an employee or an independent contractor. For federal employment tax purposes, a business must examine the relationship between it and the worker. The IRS Small Business and Self-Employed Tax Center on the IRS website offers helpful resources.

Worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Businesses normally do not have to withhold or pay any taxes on payments to independent contractors. The earnings of a person working as an independent contractor are subject to self-employment tax.

The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done. Small businesses should consider all evidence of the degree of control and independence in the employer/worker relationship. Whether a worker is an independent contractor or employee depends on the facts in each situation.

Help with Deciding
To better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties.

Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:

• Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
• Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
• Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
• Training a worker on how to do the job — or periodic or on-going training about procedures and methods — is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.

Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:

• Significant investment in the equipment the worker uses in working for someone else.
• Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
• Opportunity for profit or loss is often an indicator of an independent contractor.
• Services available to the market. Independent contractors are generally free to seek out business opportunities.
• Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.

Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:

• Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
• Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
• The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
• Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.

Consequences of Misclassifying an Employee
Classifying an employee as an independent contractor with no reasonable basis for doing so makes employers liable for employment taxes. Certain employers that can provide a reasonable basis for not treating a worker as an employee may have the opportunity to avoid paying employment taxes. See Publication 1976, Section 530 Employment Tax Relief Requirements for more information.

In addition, the Voluntary Classification Settlement Program (VCSP) offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.

The IRS can help employers determine the status of their workers by using Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer’s Supplemental Tax Guide, is also an excellent resource.

Workers who believe an employer improperly classified them as independent contractors can use Form 8919 to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.

The IRS Small Business and Self-Employed Tax Center provides a multitude of resources for small businesses as well as self-employed independent contractors.

Additional Resources:

• Publication 15-A, Employer’s Supplemental Tax Guide
• Form 1040-ES, Estimated Tax for Individuals
• Publication 505, Tax Withholding and Estimated Tax
• Publication 535, Business Expenses
• For information on eligibility for a voluntary program to reclassify workers as employees with partial relief from federal employment taxes, visit Voluntary Classification Settlement Program (VCSP).

IRS Field Service Advice 20172801F: Gift Tax Returns

Business Planning and More..... At Hoffman & Associates, clients are the most important asset to our firm. We are committed to providing the highest quality of service and delivering the best value at all times. By listening compassionately, understanding all needs and then delivering the best solution, we are able to help clients protect their legacies by becoming better planners, better business owners, and stronger families.

IRS Field Service Advice (FSA) 20172801F provides a reminder that gift tax returns must be filed by taxpayers in order to start the statute of limitations. Generally, a gift that is adequately disclosed on a gift tax return or a schedule thereto will start a 3 year statute of limitations which the IRS has to contest the value of the gift. If the gift is not adequately disclosed, or if no gift tax return is filed, there is no statute of limitations and the gift may be subject to IRS audit indefinitely. If you have questions or need help in the preparation of a gift tax return, we can help. Contact us at 404-255-7400 or info@hoffmanestatelaw.com.

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IRS Information Letter 2017-0015

Joe Nagel Website PictureIRS Information Letter 2017-0015 below provides a requesting taxpayer guidance on the proper amount of income includible in the taxapyer’s income from a life insurance split dollar arrangement entered into with his/her employer. This is a good reminder to review your split dollar arrangements periodically to make sure they are functioning and taxed as intended by the parties to the contract. If you need help with a split dollar arrangement, we can help. Contact us at 404-255-7400 or info@hoffmanestatelaw.com.

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A Benefit-Boosting Social Security Strategy

douglas mcalpineAlthough “file and suspend” is no longer available as a Social Security planning tool (expired on April 30, 2016), there is one spousal strategy that still exists. A restricted application called “file as a spouse first” can be filed when you reach full retirement age (FRA) if you turned 62 by January 1, 2016 (born in 1953 or earlier).

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IRS Tax Court Memo 2017-62: Castigliola v. Commissioner

wins-imageIn Castigliola v. Commissioner, a law firm claimed that the member managers of their professional limited liability company were “limited partners” under IRC Section 1403 and so not subject to self employment taxes on distributable shares of income over and above guaranteed payments paid to the attorneys as their compensation.  

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IRS Tax Court Memo 2017-099: Katrina E. Taylor and Avery Taylor v. Commissioner

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The following Tax Court Memorandum decision underscores the importance of substantiating auto and travel expenses. The court noted that in Rogers v. Commissioner, T.C. Memo. 2014-141, 108 T.C.M. (CCH) 39, 43. “Section 274(d) imposes relatively strict substantiation requirements for deductions claimed for (among other things) “listed property.” Under section 280F(d)(4) listed property includes any “passenger automobile.” No deduction is allowed under section 274(d) unless the taxpayer substantiates, by adequate records or by sufficient evidence corroborating her own statements, the amount, time and place, and business purpose for each expenditure. Sec. 1.274-5T(a), Sec. 1.274-5T(b), and Sec. 1.274-5T(c).”

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