IRS Tax Tip 2017-26: Medical and Dental Expenses May Impact Your Taxes

business lawHere is what you need to know if you are claiming medical/dental expenses as itemized deductions:

Medical expenses can trim taxes. Keeping good records and knowing what to deduct make all the difference. Here are some tips to help taxpayers know what qualifies as medical and dental expenses:

Itemize. Taxpayers can only claim medical expenses that they paid for in 2016 if they itemize deductions on a federal tax return.
Qualifying Expenses. Taxpayers can include most medical and dental costs that they paid for themselves, their spouses and their dependents including:

• The costs of diagnosing, treating, easing or preventing disease.
• The costs paid for prescription drugs and insulin.
• The costs paid for insurance premiums for policies that cover medical care.
• Some long-term care insurance costs.

Exceptions and special rules apply. Costs reimbursed by insurance or other sources normally do not qualify for a deduction. More examples of what costs taxpayers can and can’t deduct are in IRS Publication 502 , Medical and Dental Expenses.

Travel Costs Count. It is possible to deduct travel costs paid for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. For use of a car, deduct either the actual costs or the standard mileage rate for medical travel. The rate is 19 cents per mile for 2016.
No Double Benefit. Don’t claim a tax deduction for medical expenses paid with funds from your Health Savings Accounts or Flexible Spending Arrangements . Amounts paid with funds from these plans are usually tax-free.
Use the Tool. Taxpayers can use the Interactive Tax Assistant tool on IRS.gov to see if they can deduct their medical expenses.

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return .

For more information regarding this or any other tax concern please contact Hoffman & Associates at 404-255-7400 or info@hoffmanestatelaw.com.

2017 IRS Tax Tip: Avoid Overpaying User Fees for Your Voluntary Correction Program Submission

wins-imageFor taxpayers who have filed or intend to file under the voluntary correction program, the IRS has recently issued this helpful notice concerning reduced user fees for such applications under certain circumstances. See Revenue Procedure 2017-4 for more information on the determination of applcable user fees for the voluntary compliance program. Should you have any questions or concerns regarding this information please feel free to give us a call at 404-255-7400 or email us at info@hoffmanestatelaw.com.

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Internal Revenue Bulletin 2017-11: Employee Plans

DSC00052Here is Internal Revenue Bulletin 2017-11 with information regarding the notice extending the period for an employer that provides a qualified small employer health reimbursement arrangement (QSEHRA) to furnish an original written notice to its eligile employees.  Should you have any questions or concerns regarding this information, please feel free to call us at 404-255-7400 or email us at info@hoffmanestatelaw.com.

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Planning With Uncertainty

business lawWith the election of Donald Trump as President, many income, estate, and gift tax issues are in a state of uncertainty. President-Elect Trump has mentioned eliminating the Estate Tax, but it’s unclear if he will make that a priority, or if Congress is interested in such a change.

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Overtime Law Update

IAN M. FISHERIn  June, we warned business clients that new regulations governing overtime laws would take effect on December 1, 2016. However, a number of states sued the Department of Labor and on November 23, the United States District Court for the Eastern District of Texas issued an injunction blocking the implementation from taking effect.

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IRS Phishing Scams

douglas mcalpineIn  keeping with our ongoing effort to make you aware of security issues surrounding your tax returns and interaction with the IRS, we are posting the Service’s most recent bulletin regarding security.  Please do not hesitate to contact us with any questions or concerns at 404-255-7400.

IRS, Security Summit Partners Remind Taxpayers to Recognize Phishing Scams

WASHINGTON –The Internal Revenue Service and its Security Summit partners cautioned taxpayers today to avoid identity theft by watching for phishing scams that can increase around the tax season.   The IRS, state tax agencies and the tax industry – all partners in the fight against identity theft- reminded taxpayers that the easiest way for an identity thief to steal taxpayer information is by simply asking for it. As a result, each day people fall victim to phishing scams through emails, texts, or phone and mistakenly turn over important data. In turn, cybercriminals try to use that data to file fraudulent tax returns or commit other crimes.

This is the second reminder to taxpayers during the “National Tax Security Awareness Week.” This week, the IRS, states and the tax community are sharing information to taxpayers and tax professionals as a part of the ongoing Security Summit effort to combat refund fraud and identity theft.

Surge in Email, Phishing and Malware Schemes

The IRS saw an approximate 400 percent surge in phishing and malware incidents during the 2016 tax season.

Scam emails are designed to trick taxpayers into thinking these are official communications from the IRS or others in the tax industry, including tax software companies. These phishing schemes can ask taxpayers about a wide range of topics. Emails can seek information related to tax refunds, filing status, confirming personal information, ordering transcripts, verifying PIN information and asking people to verify their tax software account.

Variations of these scams can be seen via text messages, and the misleading communications can be seen in every section of the country.

When people click on these email links, they are taken to sites designed to imitate an official-looking website, such as IRS.gov. The sites ask for Social Security numbers and other personal information, which could be used to help file false tax returns. The sites also may carry malware, which can infect people’s computers and allow criminals to access your files or track your keystrokes to gain information.

For more details, see:

  • IR-2016-28, Consumers Warned of New Surge in IRS Email Schemes during 2016 Tax Season; Tax Industry Also Targeted
  • IR-2016-15, Phishing Remains on the IRS “Dirty Dozen” List of Tax Scams for the 2016 Filing Season

As part of the “Taxes. Security. Together.” campaign aimed at encouraging taxpayers to take stronger measures to protect their financial and tax data, the IRS and its Security Summit partners urged people not to give out personal information based on an unsolicited email request.

The campaign calls for taxpayers take the time to examine, identify and avoid emails that:

  • Contain a link. Scammers often pose as the IRS, financial institutions, credit card companies or even tax companies or software providers. These scams may claim they need the recipient to update their account or request they change a password. The email offers a link to a spoofing site that may look similar to the legitimate official website. Taxpayers should follow a simple rule: Don’t click on the link. If in doubt, they should go directly to the legitimate website to access the account.
  • Contain an attachment. Another option for scammers is to include an attachment to the email. This attachment may be infected with malware that can download malicious software onto the recipient’s computer without their knowledge. If it is spyware, it can track the recipient’s keystrokes to obtain information about their passwords, Social Security number, credit cards or other sensitive data. Remember, taxpayers shouldn’t open attachments from unknown sources.
  • Are from a “government” agency or “financial institution.” Scammers attempt to frighten people into opening email links by posing as government agencies, financial institutions and even tax companies. Thieves often try to imitate the official organizations, especially tax-related ones during the filing season.
  • Are from a “friend.” Scammers also hack email accounts and try to leverage the stolen email addresses. Recipients may receive an email from a “friend” that just does not seem right. It may be missing a subject for the subject line or contain odd requests or language as the underlying content. If the email seems “odd,” taxpayers should avoid clicking on any links or opening attachments.
  • Contain a false “lookalike” URL. The sending email may try to trick the recipient with the URL or web address. For example, instead of www.IRS.gov, it may be a false lookalike such as www.irs.gov.maliciousname.com. To verify the authenticity, a recipient can place their cursor over the text to view a pop-up of the real URL.

Learning to recognize and avoid phishing emails – and sharing that knowledge with family members – is critical to combating identity theft and data loss.

2016 Post-Election Tax Update

mary g. daughteryAny change in Presidential Administration brings the possibility, indeed the likelihood, of tax law changes and the election of Donald Trump as the 45th President of the United States is no exception. During the campaign, President-elect Trump outlined a number of tax proposals for individuals and businesses. This article highlights some of the President-elect’s tax proposals.

Keep in mind that a candidate’s proposals can, and often do, change over the course of a campaign and also after taking office. This article is based on general tax proposals made by the President-elect during the campaign and is intended to give a broad-brush snapshot of those proposals.

At the same time, the end of the year may bring some tax law changes before President Obama leaves office. This letter also highlights some of those possible changes with an eye on how late tax legislation could impact your year-end tax planning.

Campaign proposals

During the campaign, President-elect Trump called for reducing the number of individual income tax rates, lowering the individual income tax rates for most taxpayers, lowering the corporate tax rate, creating new tax incentives, and repealing the Affordable Care Act (ACA) (including presumably the ACA’s tax-related provisions). The President-elect, in his campaign materials, highlighted several goals of tax reform:

  • Tax relief for middle class Americans
  • Simplify the Tax Code
  • Grow the American economy
  • Do not add to the debt or deficit

President-elect Trump also identified during the campaign a number of tax-related proposals that he intends to pursue during his first 100 days in office:

  • The Middle Class Tax Relief and Simplification Act: According to Trump, the legislation would provide middle class families with two children a 35 percent tax cut and lower the “business tax rate” from 35 percent to 15 percent.
  • Affordable Childcare and Eldercare Act:  A proposal described by Trump during the campaign that would allow individuals to deduct childcare and elder care from their taxes, incentivize employers to provide on-site childcare and create tax-free savings accounts for children and elderly dependents.
  • Repeal and Replace Obamacare Act: A proposal made by Trump during the campaign to fully repeal the ACA.
  • American Energy & Infrastructure Act: A proposal described by Trump during the campaign that “leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.”

Individual income taxes

The last change to the individual income tax rates was in the American Taxpayer Relief Act of 2012 (ATRA), which raised the top individual income tax rate. Under ATRA, the current individual income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent. During the campaign, President-elect Trump proposed a new rate structure of 12, 25 and 33 percent:

  • Current rates of 10% and 15% = 12% under new rate structure.
  • Current rates of 25% and 28% = 25% under new rate structure.
  • Current rates of 33%, 35% and 39.6% = 33% under new rate structure.

This rate structure mirrors one proposed by House Republicans earlier this year. During the campaign, President-elect Trump did not detail the precise income levels within which each bracket percentage would fall, instead generally estimating for joint returns a 12% rate on income up to $75,000; a 25% rate for income between $75,000 and $225,000; and 33% on income more than $225,000 (brackets for single filers will be half those dollar amounts) and “low-income Americans” would have a 0% rate. As further details emerge, our office will keep you posted.

Closely-related to the individual income tax rates are the capital gains and dividend tax rates. The current capital gains rate structure, imposed based upon income tax brackets, would presumably be re-aligned to fit within President-elect Trump’s proposed percent income tax bracket levels.

AMT and more

President-elect Trump proposed during the campaign to repeal the alternative minimum tax (AMT). The last time that Congress visited the AMT lawmakers voted to retain the tax but to provide for inflation-adjusted exemption amounts.

During the campaign, Trump proposed to repeal the federal estate and gift tax. The unified federal estate and gift tax currently starts for estates valued at $5.49 million for 2017 (essentially double at $10.98 million for married individuals), Trump, however, also proposed a “carryover basis” rule for inherited stock and other assets from estates of more than $10 million. This additional proposal has already been criticized by some Republican members of Congress, while some Democrats have raised repeal of the federal estate tax as a non-starter.

Other proposals made by President-elect Trump during the campaign would limit itemized deductions, eliminate the head-of-household filing status and eliminate all personal exemptions. President-elect Trump also has called for increasing the standard deduction. Under Trump’s plan, the standard deduction would increase to $15,000 for single individuals and to $30,000 for married couples filing jointly. In contrast, the 2017 standard deduction amounts under current law are $6,350 and $12,700, respectively, as adjusted for inflation.

Possible new family-oriented tax breaks were discussed by President-elect Trump during the campaign. These include the creation of dependent care savings accounts, changes to earned income tax credit and enhanced deductions for child care and eldercare.

Health care

The Affordable care Act (ACA) created a number of new taxes that impact individuals and businesses. These taxes range from an excise tax on medical devices to taxes on high-dollar health insurance plans. The ACA also created the net investment income (NII) tax and the Additional Medicare Tax, both of which generally impact higher income taxpayers. The ACA also made significant changes to the medical expense deduction and other rules that affect individuals. For individuals and employers, the ACA created new mandates to carry or offer insurance, or otherwise pay a penalty.

President-elect Trump made repeal of the ACA one of the centerpieces of his campaign. During the campaign, the President-elect said he would call a special session of Congress to repeal the ACA. At this time, how repeal may move through Congress remains to be seen. Lawmakers could vote to repeal the entire ACA or just parts. Our office will keep you posted of developments as they unfold.

Business tax proposals

On the business front, President-elect Trump highlighted small businesses, the corporate tax rate, and some international proposals during his campaign. Along with simplification, and the reduction, of taxes for small business.

Particularly for small businesses, Trump has proposed a doubling of the Code Sec. 179 small business expensing election to $1 million.  Trump has also proposed the immediate deduction of all new investments in a business, which has also been endorsed by Congressional tax reform/simplification advocates.

The current corporate tax rate is 35 percent. President-elect Trump called during the campaign for a reduction in the corporate tax rate to 15 percent. He also proposed sharing that rate with owners of “pass through” entities (sole proprietorships, partnerships and S corporations), but only for profits that are put back into the business.

Based on campaign materials, a one-time reduced rate would also be available to encourage companies to repatriate earnings of foreign subsidiaries that are held offshore. Many more details about these corporate and international tax proposals are expected.

Year-end 2016

More immediately, the calendar is quickly turning to 2017. Congress will meet for a “lame duck” session and is expected to take up tax legislation. Exactly what tax legislation Congress will consider before year-end remains to be seen. Every lawmaker has his or her “key” legislation to advance before the year-end. They include:

  • Legislation to renew some expiring tax extenders, especially energy extenders.
  • Legislation to fund the federal government, including the IRS, through the end of the 2017 fiscal year.
  • Legislation to enhance retirement savings for individuals.
  • Legislation to help citrus farmers, small businesses and more.

Some of these bills, if passed and signed into law, could impact year-end tax planning. The expiring extenders include the popular higher tuition and fees deduction along with some targeted business incentives.  If these extenders are renewed, or made permanent, our office can assist you in maximizing their potential value in year-end tax planning.

Another facet of year-end tax planning is looking ahead. President-elect Trump has proposed some significant changes to the Tax Code for individuals and businesses. If these proposals become law, especially any reduction in income tax rates, and are made retroactive to January 1, 2017, your tax planning definitely needs to be reviewed. Our office will work with you to maximize any potential tax savings.

Working with Congress

When the 115th Congress convenes in January 2017, it will find the GOP in control of both the House and Senate, therefore allowing Trump to move forward on his proposals more easily. It remains to be seen, however, what compromises will be necessary between Congress and the Trump Administration to find common ground. In particular, compromise will likely be needed to bring onboard both GOP fiscal conservatives who will want revenue offsets to pay for tax reduction, and Senate Democrats who have the filibuster rule to prevent passage of tax bills with fewer than 60 votes. Beyond considering tax proposals one tax bill at a time, it remains to be seen whether proposals can be packaged within a broader mandate for “tax reform” and “tax simplification.”

The information generally available now about President-elect Trump’s tax proposals is based largely on statements by him during the campaign and campaign materials. President-elect Trump will take office January 20, 2017. Between now and then, more details about his tax proposals may be available. Please contact our office if you have any questions.

For more information regarding this or any other tax related concern, please contact us at 404-255-7400 or at info@hoffmanestatelaw.com.

ESTATE TAX REPEAL? LET’S KEEP PLANNING!

michael w. hoffmanDonald Trump’s surprise election gives us a tremendous amount of hope that the federal estate tax might finally be repealed. This concept runs in the face of candidate Clinton’s proposal to reduce the estate and gift tax exemption amounts and increase the tax rates from 40% to 65%.

While we do not want to celebrate too early, a critical message is that estate planning should continue with fervor! The Donald Trump phenomenon, which results in a Republican Presidency and a Republican Congress, gives us a great deal of confidence that tax reform will be among the items addressed early in Trump’s administration. Tax reform could and should include the repeal of the federal estate and gift taxes, and the elimination of the generation skipping transfer tax that has been hanging over our heads since 1976.

However, this will take some time, and the reality is that the U.S. still has huge deficits that must be serviced with tax revenue. Granted, the percentage of the federal revenue coming from death taxes is minimal, but there is also the argument that the tax on the transfer of wealth is “fair” in a system that allowed the accumulation of such wealth. This theory is combined with the tempering affect that the death tax has on the growth of family dynasty wealth (taking from the rich to provide for the poor).

It is likely that the current federal estate and gift tax laws will be replaced by a system more popular in other parts of the world, such as the capital gains calculation that takes place in Canada, Great Britain and other western civilizations. In those countries, at death, the difference between the tax basis of property and its fair market value will be subject to a tax similar to the capital gains tax that would have occurred had the decedent sold the appreciated assets. This accomplishes the practical role of allowing tax basis to be stepped up to fair market value at the death of an owner, and replaces the estate and gift tax revenue with a fair method of taxing growth as it is done in the income tax arena. Of course, there will have to be exemptions and exceptions made for family farms and businesses so these types of assets would not have to be leveraged or sold in order to pay Uncle Sam. All of these details, and many more, will have to be worked out by Congress and the U.S. Treasury Department (IRS).

In the meantime, it appears that some of the more popular techniques that we have been implementing over the last 20 or so years will become even more popular. The use of trusts has long been an important aspect of estate planning. Trusts can own property outside of a taxable estate, trusts can allow an orderly transition of control through the naming and choice of trustees, trusts can protect property from creditors and divorce, trusts avoid probate, and trusts provide significant income tax savings flexibility for current and future beneficiaries.

An important trust that we use in estate planning is the Family Trust, where parents set up trusts for their kids while they are alive, as opposed to waiting until both parents are deceased, and begin funding those trusts with assets by way of gift and otherwise, to remove property from the parents’ taxable estates.

One type of Family Trust that we often use is to make the trust a grantor trust for federal income tax purposes. That means for income tax purposes the IRS ignores the existence of the trust and all the taxable income and deductions associated with the Family Trust continue to be reported on the grantor’s individual income tax return. In our practice, we refer to these Family Trusts as “Defective Grantor Trusts”, or DGTs.

One of the features that allows a trust to be a grantor trust during the grantor’s lifetime is the ability to substitute property in the trust with other property from the grantor. This has been a popular benefit of using DGTs because the trust can hold appreciating assets, removing the appreciation from the grantor’s estate, but those appreciated assets can be swapped for cash or other assets, allowing the low-basis, highly-appreciated assets to come back into the grantor’s estate before death, in order to allow a step-up in tax basis at death for income tax purposes. This has always been kind of “have your cake and eat it too”, removing appreciating assets out of your estate, but retaining the ability to get those assets back in order to achieve an increase in tax basis at death. So, one of the things that we have tried to accomplish with our estate planning clients is to assist them in monitoring the assets in their Family Trusts, to determine if and when it would be desirable to substitute those highly appreciated assets for other assets out of our clients’ taxable estates. Of course, timing is everything, and there is always the risk that the substitution might not occur timely, but at least our clients have retained that flexibility.

Now, with the chance of repeal of our federal estate tax, the strategy with these same grantor trusts might change. In other words, since only appreciated assets would be subject to a capital gains tax at death, it may become more important than ever to remove these appreciated assets from the estate, put them in a grantor trust, and leave liquid, high basis assets in the parents’ taxable estates. Then, if the next President and/or Congress were to reinstate a federal estate tax, we can easily shift strategy and look to exercise the substitution power that exists with the DGTs.

Remember that we still have the evil overhang of the proposed 2704 regulations (see prior articles) which will eliminate much of the discounting that we have enjoyed for valuation purposes when gifting or selling hard to value assets to Family Trusts. These proposed rules will become effective, according to the IRS, 30 days after they become final. While we don’t know when these proposed regs will become final, it does take typically 12 to 18 months for these regulation projects to become completed. The regs were proposed in early August, so we are still “under the gun” for those clients who have situations that warrant this type of estate planning.

So, let’s be happy with the potential repeal of the estate tax but be realistic in what that means. If anything, as new rules evolve, we should be focusing on flexible estate planning now, more than ever, as future tax reform will create new tax regimes. For instance, if the new tax rules no longer encompass the concept of a $5,500,000 exemption per person, will all that exemption that was not used before the estate tax is repealed be lost forever? So, while President-Elect Trump goes about changing our tax system to make us more competitive in the world, and he is ”draining the swamp”, let us pay attention to details and reap the benefits of continuous planning.

For more information about this or any other estate planning topic, please contact us directly at 404-255-7400 or email us at info@hoffmanestatelaw.com.

Estate Planning Is in a Pressure Cooker!

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Not only has the IRS threatened to change the rules of valuing gifts, which will have a significant impact on many estate planning techniques used over the last several decades, the presidential elections will have a huge impact over whether the estate and gift tax law survives, or becomes extremely more expensive and complicated.

After an agonizing wait, the IRS issued Proposed Regulations on August 4th that will eliminate many of the valuation discounts applicable for family-owned businesses and wealth in general. These new rules will become effective thirty days after publication of final regulations, which are expected in the next 12 months.

That means gifts prior to the effective date of the regulations may continue taking into account all applicable valuation discounts and used over the last several decades, and those family business owners who postpone these estate planning techniques of transferring wealth to trusts for future generations will be hurt economically under the new rules. While we do not know for sure what the final regulations will say, the question is obvious, is any further postponement worth the risk?

Additionally, there is a substantial difference between the two presidential candidates’ tax policy proposals, particularly relating to the estate and gift tax. Donald Trump proposes to eliminate the estate and gift tax. Mrs. Clinton, however, proposes to reduce the estate tax exemption (which will be $5,490,000 in 2017) to $3,500,000 (per person) with no adjustment for inflation. She proposes to reduce the lifetime gift tax exemption from $5,490,000 (2017) to $1,000,000, with no adjustment for inflation.

This situation is reminiscent of the concern in 2012 when we feared the exemptions may go from $3,500,000 to $1,000,000. Many clients scurried to take advantage of estate and gift tax advantages before year-end. Those clients, by the way, are generally laughing all the way to the bank as not only have they moved significant wealth out of the gift tax system, but the statute of limitations on the IRS’ ability to review the substance of those transactions has just about expired.

Mrs. Clinton is not done there! She proposes to raise the current estate tax rate from a flat 40% to 45% on estates under $10,000,000, 50% for estates from $10,000,000 to $50,000,000, 55% for estates from $50,000,000 to $500,000,000, and 65% for estates for over $500,000,000. While this seems shocking, the maximum estate tax margin rates when I began practicing in 1976 was technically 77%!

Obviously, the double attack from the IRS and the potential Clinton Administration will raise havoc in the estate planning circles. Be ready to react relatively quickly as these proposals threaten to become reality.

For more information regarding this or any other estate planning concern, please contact us at 404-255-7400 or email us at info@hoffmanestatelaw.com.

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