Tax Planning

If you’ve formed certain habits related to how you handle meals, entertainment, transportation, and parking as it relates to your business and taxes, the time to change those habits has come.

As this report notes, tax reform law commonly referred to as H.R. 1 Tax Cuts and Jobs Act of 2017 has changed the deductibility of certain meals, entertainment and transportation expenses. Before 2018, a taxpayer could deduct 50 percent of business meals and entertainment and 100 percent of meals provided through an in-house cafeteria or meals provided for the convenience of the employer (i.e., also known as a de minimis fringe benefit).

Not so anymore.

Under the new law, effective January 1, 2018, entertainment is no longer deductible and meals provided through an in-house cafeteria or for the convenience of the employer are subject to the 50 percent limitation.

And for tax years after 2025, meals provided through in-house cafeteria or for the convenience of the employer will not be deductible at all (unless Congress makes changes before 2025 when certain provisions change or expire). No change was made to the rule allowing a 50 percent deduction for business meals and a 100 percent deduction for expenses incurred for recreational, social, or similar activities (including facilities, but not club dues) primarily for the benefit of employees (other than employees who are highly compensated employees).

As Tax Connections notes, prior to TCJA, entertainment, amusement, and recreation expenses could be deducted (subject to certain restrictions) to the extent the taxpayer could “establish that the item was directly related to, or in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that such an item was associated with, the active conduct of the taxpayer’s trade or business.”

TCJA §13304(a) fully repealed the deductibility of these items, regardless of any proximate business purpose.

No More Free Parking

As discussed in a blog by attorneys Durham Jones & Pinegar things have also really changed when it comes to the deductibility of automobile parking.

Effective January 1, 2018, the Act eliminates the tax deduction benefit that has long been available to employers that subsidize their employees’ transit and parking expenses. For years employers could provide or pay for parking or transit passes (worth up to $255 a month to employees in 2017) as a tax-free benefit to help pay for their employees’ commuting expenses, and then deduct those costs from their business taxable income.

Under the Tax Cuts and Jobs Act (the Act) employers can still provide parking or transit passes to employees, but the employer will no longer get to deduct the costs of that benefit. Any arrangement where the employer pays for employee parking, no matter how structured, will mean a non-deductible expense for the employer.

Parking is employer-provided if:

• It is on property that the employer either owns or leases,
• The employer pays someone else (such as their landlord or a parking lot/garage owner) for the parking, or
• The employer reimburses the employee for parking expenses.

According to the Durham Jones & Pinegar blog, employers who wish to avoid the loss of the tax deduction or the after-tax imposition of the parking cost on their employees will need to create a method to continue providing tax-deductible parking to employees. Refer to Pinegar for relevant examples and workarounds.

In conclusion, the information recited in this blog is solely intended to emphasize from a different angle information presented elsewhere. This information is not intended to be used by the reader for any purpose other than general information. We forewarn the reader against making any form of business decision based solely on the blog we have created as these articles serve as snippets and brief overviews of broad, complex situations. Prior to making any business decision, first seek advice from a suitable professional such as a licensed legal or accounting professional. 

After a lengthy process, Congress and the President did what they had to do in late December 2017 to put into law one of the most significant pieces of legislation in decades: the Tax Cuts and Jobs Act (TCJA). The Act put into place a number of provisions that will affect Not for Profit Organizations. Note the following areas of tax impact that the provisions of the TCJA  brought in relation to Not For Profit Organizations, as noted in Yeo Yeo:

• Changes the computation of unrelated business taxable income (UBIT) if an organization has more than one unrelated trade or business. It’s possible that more nonprofits will have to pay UBIT. As Nolo explains:

Subject to numerous exceptions and emptions, tax-exempt nonprofits that operate businesses unrelated to their charitable mission must pay an unrelated business income tax (UBIT) on their net unrelated business income. Under prior law, a nonprofit that operated multiple unrelated businesses could deduct the losses from one business from the profits from another to determine the amount of net unrelated business income subject to UBIT. The TCJA does not allow this. Starting in 2018, each unrelated business must determine its net income without regard to losses from other unrelated businesses. As a result, it’s likely that more nonprofits will have to pay UBIT.

• Increases UBIT by the amount of certain fringe expenses for which a deduction is disallowed.
• Imposes a 21% excise tax on compensation of over $1 million for the five highest paid employees.
• Imposes a 1.4% excise tax on net investment income of private colleges.
• Modifies the rules for charitable contributions:
  • Repeals the special rule in Code Sec. 170(l) that provides a charitable deduction for the amount paid for the right to purchase tickets for athletic events;
  • Repeals the Code Sec. 170(f)(8)(D), effectively ensuring that donee organizations will not be allowed or required to report details of donations of $250 or more
  • Increases the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations to 60%;

Will the TCJA Dampen Charitable Giving or Stimulate It?

One point of view, usually the side that is broadly opposed to the TCJA, makes the case the TCJA will hurt charitable giving because, among other things, it provides to taxpayers such a huge increase for standard deductions. PJ News sums this point of criticism up as follows:

The Act roughly doubles the standard deduction for individuals ($12,000 for individuals and $24,000 for joint filers) and generally lowers individual income tax rates across the board. The Act also places an annual limitation on the state and local tax deduction at $10,000 (for both individual and joint filers). These income tax changes are scheduled to remain in effect through 2025. Doubling the standard deduction makes it much more likely that fewer people will itemize their deductions. Because a taxpayer must itemize deductions in order to obtain any income tax benefit by making a charitable contribution, a taxpayer not itemizing deductions receives no tax benefit from such a contribution. Capping the state and local tax deduction also makes it more likely that the standard deduction will be used. Even for those who will still itemize, the lower income tax rates reduces the value of the charitable deduction because with lower tax rates, less taxes are saved by taking a charitable deduction than before the Act.

An opposing point of view from the Washington Examiner makes the case that the tax cuts will actually stimulate charitable giving as income and financial resources increase as a result of the tax cuts:

The thrust of the Left’s argument is that allowing Americans to keep more of their money makes them stingier, and high taxes are needed to force Americans to take advantage of charitable tax write-offs.

It’s ironic that anyone in the nonprofit sector, which is built entirely on the generosity of individuals and corporations, can argue that higher taxes encourage charity – or that charity needs to be legislated.

This argument has no basis in economic reality, either. According to Giving USA, which tracks charitable donations, philanthropy has grown rapidly since it bottomed out during the Great Recession. Giving rose to a new high of $390 billion in 2017 largely thanks to individuals, whose giving increased nearly four percent in 2016. Giving USA also notes that donations grew substantially in 2014 and 2015 likely due to two factors: “The country’s overall economic environment continuing its path to recovery after recessionary times, and household finances seeming to stabilize.”

No matter which “side” you take, whether you agree with PJ News or the Washington Examiner, here are five steps nonprofits should take now to tackle tax reform:

1. Assess impact. Tax professionals will likely need to review the law to measure their organization’s specific circumstances against it to assess the impact of each provision, as well as the holistic effect on their bottom line.
2. Assemble a team. While the heaviest burden may fall on accountants, companies and their finance teams will have an important role to play to gather all the necessary data.
3. Dig into the data. Assessing the impact of tax reform requires a substantial amount of data to be readily available. Nonprofits need to move from modeling the impact of tax reform to focus on data collection and computations as soon as possible.
4. Establish priorities.  Focus on the areas that could have the greatest impact on your organization.
5. Initiate tax reform conversations with your tax advisor.  Tax reform of this magnitude is the biggest change we’ve seen in a generation, and will require intense focus to understand not only how the changes apply at a federal level, but also how to navigate the ripple effect this is likely to have on state taxation as well.

Most articles about the passage of the Tax Cuts and Jobs Act in December buzz about the resulting income tax consequences for individuals and businesses.

But what about the intersection of the TCJA and estate planning?

In a report by Stefi Gascon Hafen, published by AccountingToday, she comes to some interesting conclusions about the TCJA’s significant impact on estate planning.

Under the Act, the estate, gift and generation-skipping transfer taxes remain in effect with double the unified federal gift and estate tax exemption and the GST tax exemption (from $5 million to $10 million). These amounts are indexed for inflation. For 2018, the gift and estate tax exempt amounts and GST tax exempt amount is expected to equal $11.18 million ($22.36 for married couples). However, the increased exemption sunsets in 2026.

The Act left portability unchanged. If a spouse dies without exhausting his or her lifetime gift and estate tax exemption, so long as the decedent’s executor makes the proper election on an estate tax return, the unused exemption is credited or “ported” to the surviving spouse for use during life or at death. Thus, for some married couples, an “all to the other” approach with a portability election may be preferable.

Portability might seem like the right choice for married couples. But that’s not always the case as Hafen notes:

• Blended family or other intended beneficiaries: For blended families, the traditional “QTIP” trust or bypass trust may still be a better strategy to ensure that the children of the first-to-die are remainder beneficiaries at the second death.
• Creditor issues: The “all to the other” approach provides that the assets of the first-to-die will be allocated to the survivor. Because the survivor has full control over the assets, the survivor’s creditors can also reach the assets. If there is concern about creditors, a QTIP trust or bypass trust may be ideal.
• Dynasty planning: Because portability does not apply to the GST tax exemption, the GST tax exemption of the first-to-die is lost with “all to the other.”
• High appreciation potential: While the “all to the other” approach provides a step-up in basis at the death of each spouse, there are instances where removing the assets and all future appreciation out of the second-to-die’s estate produces the best results, in which case a bypass trust should be used.
• Clawback: It is not clear what will happen if an estate elects portability and the exemption subsequently decreases at the death of the second spouse. The IRS may attempt to clawback the unused exemption of the first-to-die spouse over the lower exemption amount applicable at the death of the second-to-die spouse.

Another tricky situation noted by Hafen: Many family trusts (especially those drafted before portability) use tax formulas to fund a bypass trust. Such formulas were likely drafted when the exemption amount was much lower. (It was $1.5 million in 2005!) With the increased exemption, the formula could serve to overfund the bypass trust.

New Opportunities to Transfer Wealth

As Accounting Today observes, for those who exhausted their exemption up to the 2017 $5.49 million limit, they now have another $5.69 million (or $11.38 million for a married couple) to use. However, given the sunset provision, this opportunity may only be available until 2026.

Income Tax Becomes King

In 2017, of the 2.7 million estates, only 5,190 are expected to owe federal estate tax. With the increased exemption, some predict this number to drop to 2,000.

On the other hand, while the top federal individual income tax rate is 37 percent and the top capital gains rate is 20 percent, the 3.8 percent net investment income tax remains in effect.

Thus, high net worth individuals may prefer to engage in strategies that both reduce their total income tax and transfer wealth to their descendants with as little transfer tax as possible. Some techniques include:

• Shifting income: Gift high income-producing assets to a trust that distributes taxable income to a beneficiary in a lower tax bracket.
• Charitable giving: The Act increased the charitable contribution limit to 60% of adjusted gross income.
• Delaying capital gains taxation
• Selling instead of gifting
• Exploit basis step-up: Cause low-basis assets to be included in a decedent’s nontaxable estate, receiving a step-up in basis and reducing capital gains tax at a subsequent sale.

Of course, Hafen’s conclusions are for general information purposes only. It is not intended to be used in place of advice received from a suitable professional advisor such as an attorney with an expertise in estates and trusts.

The bottom-line: new rules governing estates and trusts could generate unexpected consequences.

A recent interview style Q and A session appeared in Accounting Today featuring the expertise of author Iralma Pozo. In this series of questions, Pozo tackles some important aspects of the most significant change to the U.S. tax code since 1986. With such historic changes underway, it’s critical that you understand how the Tax Cuts and Job Act will affect cash flow issues for clients.

What’s particularly insightful is Pozo’s advice regarding parents and what they need to know about 529 plans. Her observations about developing a new strategy for charitable deductions and nonprofit organizations are also highlights:

With so many changes and factors, where do advisors start?

Legal and accounting firms, bar and state accounting associations, continuing education providers and publishers have been busy providing articles, webinars and training. In any planning, cash management and cash flow must be taken into account, to ensure there is enough money to cover ongoing expenses and operations and to fund any additional expenses taxpayers chose to incur in order to take advantage of tax changes. Looking at the bottom line is not enough in times of change; one must also make sure on a monthly basis that basic necessities are met and the lights stay on. Additionally, advisors will have to take into account which changes are permanent, temporary and due to increase or decrease between now and 2025.

How will the states react to tax reform?

In the past, many states piggybacked on the federal tax regulations. Some states such as New York have already announced plans for changes in the state tax laws. Any additional differences will have to be taken into consideration when preparing estimated tax payment calculations and projections. With some states increasing the minimum wage and providing paid family leave, there will be a lot of changes.

How will the alternative minimum tax enter the equation?

The AMT has to be taken into account in planning for individuals and corporations. The individual phase-out threshold has increased to $1 million. For individuals who prepaid real estate taxes for 2018 that were already assessed in 2017, the AMT exemptions from 2017 may yield less or no tax savings.

What are some things that advisors should discuss with parents?

Parents will benefit from the $400 increase in the refundable child tax credit. The standard deduction was increased and personal exemptions were eliminated. This change may be confusing to some parents. Parents will be able to use 529 plans to send children to elementary school.

Advisors can help families leverage caps on real estate and tax deductions with education expenses. Some parents purchase homes in counties they can barely afford in order to send their children to schools in better school districts. Some of these parents will no longer benefit from the tax savings they were accustomed to when they were able to deduct their real estate and state taxes. Advisors can help parents determine how contributions to educational savings accounts can lower their taxable income and save them money on taxes.

How can advisors help clients with retirement-related issues?

Advisors will have to help clients access their current and future earnings and tax expectations, to ensure a Roth IRA conversion is best for them. Roth IRA conversions will no longer be reversible.

How can advisors help clients with real estate investment issues?

With the caps on deduction of property and real estate taxes, mortgage interest, business interest expenses, advisors can help clients figure out what the best structure is for real estate investments. Some clients who have previously shied away from partnerships may find such entity structures more favorable or feasible.

How will entrepreneurial business owners make out with tax reform?

Business owners should be open with their advisors on what their strategic plan for the year is, how much they plan to grow and what their operating budget includes. Discussions should include which entity type is most beneficial, how the business owner can receive compensation and benefits to save taxes, and how much money the business owner needs to cover basic operations and living expenses on a monthly basis.

How can advisors help pass-through entities that are service providers?

Advisors can assist high-earning service-providing businesses set up compensation and benefits that can reduce income and increase tax savings, yet provide future benefits to business owners.

How will tax reform affect nonprofit organizations?

With the increased standard deduction, some people will no longer be able to itemize, and will no longer see a tax savings from making charitable donations. 

Executive compensation changes will particularly be something nonprofits will have to address. With potentially decreasing donations, stakeholders would prefer to see more money going to causes and programs as opposed to executive pay. Endowments will be affected by tax reform as well, with a new excise tax of 1.4 percent on the net investment income of applicable educational institutions. Investment and other advisors will have to work with educational institutions that have large endowments to ensure the organizations strategize about what to spend and what to save for the future. 

***

It’s clear that the TCJA will have far-reaching effects for years to come. For this reason, we recommend that you plan on extensive meetings with your advisors (legal and accounting) to obtain help with navigating through “the jungle” of new tax rules that reform has left us.

You will likely need to spend plenty of extra time with your legal and accounting/taxation advisors this year.

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

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

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

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

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

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

Income Tax Rates

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

Standard Deduction

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

Personal Exemption

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

Inflation Gauge

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

Family Credits and Deductions

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

Head of Household

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

Itemized Deductions

Mortgage Interest Deduction

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

State and Local Tax Deduction

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

Other Itemized Deductions

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

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

Alternative Minimum Tax

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

Student Loans and Tuition

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

Pease

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

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

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

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

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

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

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

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

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

Many itemized deductions eliminated, limited or modified:

6. Fully Eliminated

a. Miscellaneous Itemized Deductions

b. Personal Casualty and Theft Losses

7. Limited

a. State and Local Income Taxes

b. Home Mortgage Interest

8. Modified

a. Charitable Contributions

b. Gambling Losses

c. Medical Expenses

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

9. Fully Eliminated

a. Alimony

b. Tuition and Fees

c. Domestic Production Activities Deduction (DPAD)

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

11. Health care penalty eliminated.

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

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

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

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

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

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

How Individual Taxes Will Change

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

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

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

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

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

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

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

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

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

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

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

How Business Taxes Will Change

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

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

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

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

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

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

Focusing On Pass-Thru Taxation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Their report recommends that businesses avoid the following six mistakes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Math Miscalculations

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

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

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

2. Overlooking Income

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

3. Forgetting to Double-Check Numbers and Signatures

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

4. Failing to Itemize Deductions

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

5. Inaccurate Account Numbers

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

6. Changes in Your Filing Status

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

7. Tax Deductible Charitable Contributions

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

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