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What is the Impact of the Tax Reform Bill for Individuals?

The Tax Cuts and Jobs Act was passed by Congress this week. We highlight below the provisions that affect individual taxpayers:

1) There are still seven individual tax brackets but the rates have been lowered across all tax brackets.

2) The alternative minimum tax remains, although the exemption is increased.

3) The standard deduction is increased from $6,500 to $12,000 for individuals and $13,000 to $24,000 for married taxpayers.

4) The bill eliminates the $4,050 personal exemption per taxpayer and each dependent.

5) While the overall phase-out on itemized deductions for income levels beginning at $266,700 for single taxpayers and $320,000 for married taxpayers is repealed, there are significant modifications to itemized deductions.

  • All state income and local property tax (SALT) deductions are limited to a combined total of $10,000. The conference report on the bill specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.
  • The mortgage interest deduction is limited to payments on $750,000 of debt, down from $1 million, for homes purchased after December 15th, 2017.
  • The home equity loan interest deduction is repealed.
  • The deduction for moving expenses is eliminated, except for members of the military.
  • The threshold for out-of-pocket medical expenses is reduced to 7.5% of adjusted gross income, down from 10%.
  • All miscellaneous itemized deductions subject to the 2% floor are repealed.

6) Individuals will be allowed to deduct 20% of “qualified business income” from a partnership, S corporation or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership income. A limitation on the deduction is phased out based on W-2 wages above a threshold amount of taxable income. The deduction would also be disallowed for specified service trades or businesses with income above a threshold. Specified service trades or businesses are those in the fields of accounting, health, law, financial services or any business where the principal asset of the business is the reputation or skill of one or more of its employees. Generally, the 20% deduction is limited to 50% of the W-2 wages paid with respect to the business.  

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Primary Benefits of a Roth Conversion

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Timing on the Deposit of Employee 401(k) Contributions

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Cash Basis Business Taxpayers

Maximize deductions and credits for 2016 by making payments of expenses giving rise to the deduction or credit by December 31.

  • Business expenses purchased with a credit card are deductible in the year purchased, regardless of when the credit card bill is paid.
  • Delay sending late in the year invoices so that payment is not received until 2017.
  • Make sure that any new equipment purchased in 2016 is placed in service before the end of the year to qualify for a Sec. 179 or depreciation deduction.

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2016 Individual Year-End Tax Planning Tips

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New Form I-9 "Employment Eligibility Verification" for 2017

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Claiming Exemptions for Children of Divorce – Form 8332 is the Key

When parents divorce, issues can arise as to which parent is entitled to the dependency exemption and related tax benefits from supporting their children.

The dependency exemption is governed by Code Section 152 and includes what seems like a simple rule. Basically, when parents of a child do not file a joint return, the child is the “qualifying child” or dependent, of the parent with whom the child resided for the longest period of time during the year.

In the case of divorce, there is an exception to the above if the custodial parent releases his/her claim to the dependency exemption. A written declaration is required for the custodial parent to release his/her claim.

If the divorce documents were executed in 2009 or after, the noncustodial parent must attach Form 8332, “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent” signed by the custodial parent to his/her tax return. The custodial parent can either release his/her claim to the dependency exemption for the current year or for future years on the Form 8332. The form can also be used to revoke the release of the custodial parent’s claim to the dependency exemption for future years.

Based on the above, the divorce agreement should be clear about how parents intend to claim their children as dependents. If the intent is for the custodial parent to release the claim for all future years, the noncustodial parent will prefer to have a signed Form 8832 that says “all future years”. However, the custodial parent does have the ability to revoke the release of the exemption for future years or may instead just prefer to execute a new Form 8332 each year.

If the parents divorced before 2009, certain pages from the divorce agreement can be attached to the tax return in lieu of Form 8332. Form 8332 does not apply after a child turns 19.

The dependency rules for divorced parents can be complex and the outcome affects not only the dependency exemption but also the child credit and other child-related provisions.


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Excessive Salaries Paid to Your Children are not Tax Deductible

Salaries paid to your children from your business for work they performed are not deductible if excessive in amount. Salaries are deductible by a business for amounts that are reasonable for the personal services actually rendered to the business. When an amount deducted as wages involves a familial relationship, particularly a parent-child relationship, the I.R.S. may scrutinize the wages paid to determine if there is a bona fide employer-employee relationship and whether the payments were made for services actually performed for the business and reasonable in amount.

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New Filing Deadline for W-2 and 1099-MISC Forms in 2017

Employers will have less time next year to file Forms W-2 with the Social Security Administration. The new due date for filing the 2016 W-2s is now January 31, 2017, regardless of whether you file using paper forms or electronically. Previously, the deadlines for filing the Forms W-2 were February 28 and March 31, for paper forms and electronic filing, respectively. The new January 31 due date will match the date for sending copies of the forms to employees.

The new January 31 deadline also applies to Forms 1099-MISC that report nonemployee compensation.

The IRS says having these forms earlier will help it to spot tax ID theft and fraudulent returns.

Also note that only the final four digits of the Social Security numbers will need to go on the W-2s sent to employees and the 1099-MISC sent to independent contractors. The full number will still need to be listed on the copy the service gets.

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Exclusion from Gain on Sale of Home for Unforeseen Circumstances

Taxpayers who have owned and used a home as their principal residence for at least two of the five years leading up to the sale can exclude up to $250,000 ($500,000 if married filing jointly) of the gain when they sell the home. Taxpayers who don’t meet these conditions can qualify for a reduced exclusion if the sale is because of a change in place of employment, health, or unforeseen circumstances.

Unforeseen circumstances are events the taxpayer could not reasonably have anticipated before purchasing and occupying the residence. The regulations define several specific-event safe harbors as unforeseen circumstances, and include:

  1. multiple births
  2. divorce or legal separation
  3. eligibility for unemployment compensation
  4. death of the taxpayer, spouse or co-owner, or a member of the household
  5. destruction or condemnation of residence
  6. casualty loss due to a natural or man-made disaster or an act of terrorism

Unforeseen circumstances, outside of the specific-event safe harbors listed above, depend on the facts and circumstances. In general such circumstances include an increase in the number of dependents living under one roof, environmental factors such as crime or noise, or job-related factors.

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