What Is an Offer in Compromise with the IRS?

An offer in compromise can make you happy: “Oh boy, the IRS said yes, and my tax debts are over!” Or it can frustrate you. Let’s go over how to navigate the IRS settlement guidelines and see what an OIC entails.

Here’s the good news:

  • An OIC can be a fresh start from your IRS debt.
  • You no longer have to worry that the IRS will seize your wages or bank accounts.
  • Your credit score will no longer show any tax liens against you — the IRS releases them all.
  • IRS collections are put on hold and the compromise is investigated. And then — peace, ah, peace — from IRS certified-mail letters and visits from IRS revenue officers.
  • You put the debt behind you and you can go back to saving for retirement.

But here’s some of the bad news:

  • The IRS will dig deeply into your finances.
  • You have to tell the IRS where you work and bank and you must list your assets, including your house, cars, valuables and retirement accounts.
  • The IRS will look at your paystubs, tax returns, bank statements, business profit and loss statements and proof of payment of monthly bills.
  • After acceptance of the OIC, the IRS will put you on a five-year probation, requiring full compliance in filing and paying taxes. Not playing ball with all IRS expectations will default the settlement.

But wait! It gets even more dicey:

  • An OIC is not a quick fix — it can take the IRS a minimum of nine to 12 months to investigate, and another six months if an appeal is needed. The IRS allows five to 24 months to pay the settlement.
  • If you want to pay credit card, mortgage or car loan monthly bills, think again. The IRS may effectively take over your budgeting.
  • If the IRS determines it can collect what you owe, it will reject your offer, but you can appeal.
  • The settlement amount is not based on fairness, but on collectability.
  • It may not work at all! The IRS recently rejected 60 percent of the offers it received: 41,000 rejections out of a pool of 68,000 submissions!

Let’s see where that leaves us:

  • An OIC can be a wonderful way to rid yourself of the IRS bugging you.
  • You need to consider it from all angles to make sure it’s the right move for you.

A compromise is not the only way to clear the IRS out of your life. The agency can agree that you owe debt, but not force you to repay it — the IRS terms it currently uncollectible and puts you in its bad debt category and leaves you alone. The IRS has 10 years to collect the taxes. You could let the time frame expire rather than compromising. Bankruptcy may be able to eliminate taxes too. See what’s in your best interest.

The point is that you have options, and you should talk to a professional if you’re having tax problems.

© Copyright 2018. All rights reserved. 

How to Co-ordinate Cost Segregation with Like-kind Exchange

The Tax Cuts and Jobs Act (TCJA) was signed by the President on December 22, 2017. The TCJA is the most significant overhaul of Internal Revenue Tax code since the 1986 Tax Act under President Reagan. The Committee Report has over a thousand pages of modifications to many areas of the tax code. One piece of the new legislation (that concern most real estate investors) involves changes to the like-kind exchange rules.

When certain conditions are met, no gain or loss is recognized when a taxpayer exchanges property of like-kind (used in a trade or business or for investment purposes). Before the TCJA, a taxpayer could exchange real property for real property; and personal property for personal property (with some restrictions) without recognizing gain on the exchange. For exchanges completed after December 31, 2017, the TCJA limits this tax-free treatment to an exchange of real property only. Personal property no longer qualifies for like-kind exchange after this date. Many taxpayers and tax preparers are asking the question: How does this impact an exchange of real property that went through a cost segregation study?

Cost segregation is a valuable tax strategy to accelerate depreciation deductions. When the timing is right, this strategic tool can save taxpayers thousands of tax dollars. The primary goal of a cost segregation study is to identify all costs that can be depreciated over shorter depreciable lives. By accelerating depreciation, a taxpayer can defer federal and state income taxes and increase cash flow. If timed correctly, a taxpayer can claim more deductions in a high marginal tax year and less deductions in low marginal tax year resulting in a permanent tax savings.

The building costs identified with shorter depreciable lives (by the cost segregation study) are depreciated as Section 1245 property. Most tax preparers believe that means that these assets are personal property. The distinction that needs to be made is between the personal property (machinery and equipment) from the real property fixtures that qualify as 1245 property for tax purposes but are deemed to be real property by state law. State law generally determines the classification of property as real or personal. For like-kind exchange purposes, the courts have held that state law, although not controlling, is generally followed to determine whether property is real or personal. As such, fixtures can be 1245 property with a shorter depreciable life for depreciation purpose but real property for like-kind exchange purpose. Taxpayers still need to be aware of the potential recapture rules under 1245(b)(4) and 1245(d)(4) but this personal property vs. real property distinction should help taxpayers navigate like-kind exchanges with more comfort.

Finally, according to the Committee Report, it is the intention of the Congress that real property eligible for like-kind exchange treatment under prior law continue to be eligible under TCJA. The expert opinion is that this language means that the treatment of real property that went through cost segregation study should continue to be eligible for like-kind exchange treatment as it has in the past.

© Copyright 2018. All rights reserved. 

Bracket Changes and More From the IRS

You haven’t even filed your 2017 taxes yet, but the IRS has already announced changes that will affect your 2018 taxes, which you’ll be filing in 2019. The changes were announced in Revenue Procedure 2017-58, which runs 28 pages, but below are some key points. How do these changes impact you?

Of course, if any meaningful tax reform is passed, anything can be changed. We’ll keep you posted on any developments that affect you.

  • The standard deduction for married filing jointly rises to $13,000 for tax year 2018, up $300. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,500 in 2018, up from $6,350 in 2017, and for heads of households, the standard deduction will be $9,550 for tax year 2018, up from $9,350 for tax year 2017.
  • The personal exemption for tax year 2018 rises to $4,150, an increase of $100. The exemption is subject to a phase-out that begins with adjusted gross incomes of $266,700 ($320,000 for married couples filing jointly). It phases out completely at $389,200 ($442,500 for married couples filing jointly).
  • The bracket changes have not gone up significantly from the previous year. For example, the floor for the 28 percent “married — filing jointly” category is up from $153,101 to $156,151. The details of each bracket are described in the revenue procedure.
  • The Alternative Minimum Tax exemption amount for tax year 2018 is $55,400, and begins to phase out at $123,100 ($86,200 for married couples filing jointly, for whom the exemption begins to phase out at $164,100). The 2017 exemption amount was $54,300 ($84,500 for married couples filing jointly). For tax year 2018, the 28 percent tax rate applies to taxpayers with taxable incomes above $191,500 ($95,750 for married individuals filing separately).
  • The tax year 2018 maximum Earned Income Credit amount is $6,444 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,318 for tax year 2017. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For tax year 2018, the monthly limitation for the qualified transportation fringe benefit is $260, as is the monthly limitation for qualified parking.
  • For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage remains as it was for 2017: $695.
  • For tax year 2018, for participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,300, an increase of $50 from tax year 2017, but not more than $3,450, an increase of $100 from tax year 2017. For self-only coverage, the maximum out-of-pocket expense amount is $4,600, up $100 from 2017. For tax year 2018, for participants with family coverage, the floor for the annual deductible is $4,600, up from $4,500 in 2017; however, the deductible cannot be more than $6,850, up $100 from the limit for tax year 2017. For family coverage, the out-of-pocket expense limit is $8,400 for tax year 2018, an increase of $150 from tax year 2017.
  • For tax year 2018, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000, up from $112,000 for tax year 2017.
  • For tax year 2018, the foreign earned income exclusion is $104,100, up from $102,100 for tax year 2017.
  • Estates of decedents who die during 2018 have a basic exclusion amount of $5.6 million, up from a total of $5.49 million for estates of decedents who died in 2017.
  • The annual exclusion for gifts increased to $15,000, an increase of $1,000 from the exclusion for tax year 2017.

Contact us at info@cpa-wfy.com, and we’ll explain how they change your tax situation.

© Copyright 2017. All rights reserved.

Big Changes in Social Security and Retirement Plans for 2018

From 401(k) plans to individual retirement accounts to Social Security, the federal government has been busy in recent weeks adjusting numbers for 2018. Whether you’re an employee or business owner, senior management or nonexempt staff, these changes may affect how you approach retirement in the coming months and years.

Social Security: New ceilings

First, let’s start with what is not changing. The 7.65 percent Social Security deduction remains the same. And as before, it’s doubled to 15.30 percent for the self-employed.

However, the maximum earnings subject to Social Security rises from $127,200 to $128,700, a $1,500 increase. The Society for Human Resource Management estimates that this change means 12 million more workers will be paying more Social Security tax than before. The 1.45 percent Medicare portion, which has no ceiling, remains unchanged.

Those who are working while collecting Social Security catch a small break: The SSA is raising slightly the amount people can earn before losing a portion of Social Security benefits. The new amounts are $10 or $40 a month, depending on the recipient’s status.

Another significant change is to the maximum Social Security benefit for those retiring at full retirement age, which changes from $2,687/month to $2,788/month, a $101 increase. More details are available on the Social Security site.

Retirement plan limits rise

Workers who can afford to do so can put away a little more for retirement: The limit for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500.

It’s a little more complicated for those contributing to IRAs:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000, up from $99,000 to $119,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $189,000 and $199,000, up from $186,000 and $196,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRA contributors also get a bump up: The income phase-out range is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Some IRA numbers are not changing, however:

  • The limit on annual contributions to an IRA remains $5,500. The additional catch-up contribution limit for individuals age 50 and over remains $1,000.
  • The catch-up contribution limit for employees age 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.

These are just summaries of complex rules. Be sure to give us a call or email a WFY advisor at info@cpa-wfy.com so we can explain how these changes may affect your situation.

© Copyright 2017. All rights reserved.

Senate Tax Plan Outline Released

The Senate Republican’s tax reform plan was released last week. Several proposals changed from the House Tax bill. The key changes in the plan from the current law are as follows:

Individuals:

  • Current tax rates: Seven brackets from 10% to 39.6%.
  • Proposed tax rates: Seven brackets at 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%.
  • Current standard deduction: $6,350 individuals and $12,700 married filing joint.
  • Proposed standard deduction: $12,000 individuals and $24,000 married filing joint.
  • Elimination of personal exemptions, worth $4,050 per person.
  • Increase child tax credit from $1,000 to $1,650 and add a $500 credit for nonchild dependents.
  • Eliminate most itemized deductions, including property taxes and state and local tax deductions (will keep charitable contributions and medical expense deduction).
  • Continue to exclude from gross income up to $500,000 for joint filers ($250,000 for other filers) on the sale of a principal residence if the taxpayer owned and used the home for five out of the previous eight years (currently two out of five years). The exclusion would be available once every five years  (currently every two years).
  • Repeal of the alternative minimum tax.
  • Double the exemption for the estate tax amount to $10 million (no plan for repeal).

Businesses:

  • Small and family-owned business and flow through entities (Sole Proprietorships, Partnerships and S Corporations) will receive an additional 17.4% deduction of domestic qualified business income (limited to 50% of the W-2 wages of the taxpayer) effective in 2018. Certain professional service businesses are not eligible for the deduction, with a possible exemption if the qualified income is less than $150,000 (joint filers).
  • Proposed C Corporation tax rate 20% effective in 2019 (most other provisions begin in 2018).
  • Imposing a one-time 10% tax on accumulated foreign earnings, reduced to 5% for illiquid assets.
  • Nonresidential and residential rental property tax depreciation reduced to 25 years.
  • Increase Section 179 expensing limitation, deducting the cost of certain property, to $1 million and the phase out threshold to $2.5 million (currently $510,000 expense limitation with $2 million phaseout) and certain nonresidential property improvements would also qualify for Section 179 expense.
  • Limit the deduction for net interest expenses incurred by a business in excess of 30% of the business’s adjusted taxable income and any disallowed interest may be carried forward indefinitely.
  • Eliminate the deduction allowed for Section 199 domestic manufacturing activities after 2018.
  • Disallow deductions for entertainment, amusement or recreation but retain 50% deduction for business related meals.

WFY will update you as the plan progresses into a bill.

Contact us at info@cpa-wfy.com to discuss how to maximize your 2017 tax benefits through comprehensive year-end tax planning.

House Tax Bill Outline Released

By Richard A. Huffman, CPA MST

Wright Ford Young & Co.

On the heels of the recently passed 2018 budget resolution that allows for tax legislation to increase the federal deficit by $1.5 trillion over 10 years the House Republican leaders released details of its tax overhaul plan. The key changes in the plan from the current law are as follows:

Individuals:

  • Current tax rates: Seven brackets from 10% to 39.6%.
  • Proposed tax rates: Four brackets at 12%, 25%, 35% and 39.6%.
  • Current standard deduction: $6,350 individuals and $12,700 married filing joint.
  • Proposed standard deduction: $12,000 individuals and $24,000 married filing joint.
  • Elimination of personal exemptions, worth $4,050 per person.
  • Increase child tax credit from $1,000 to $1,600 and add a $300 credit for non-child dependents.
  • Eliminate most itemized deductions, including state and local tax deductions (will keep charitable contributions deduction).
  • Limit itemized property tax deduction to $10,000.
  • Limit home mortgage interest on new loans up to $500,000 debt.
  • Repeal of the alternative minimum tax.
  • Double the exemption for the estate tax and repeal it after six years.

Businesses:

  • Small and family-owned business and flow through entity tax rate reduction
    • Current maximum tax rate 39.6%.
    • Proposed maximum tax rate 25%.
  • (Sole Proprietorships, Partnerships and S Corporations).
  • Current C Corporation tax rate 35%
  • Proposed C Corporation tax rate 20%.
  • Global minimum tax of 10% applied to income that American companies earn anywhere in the world.
  • Imposing a one-time 12% tax on accumulated foreign earnings, reduced to 5% for illiquid assets.
  • Allowing businesses to expense the cost of certain new property placed in service after September 27, 2017, and before January 1, 2023.

WFY will update you as the bill progresses through the expected many changes before it is slated for a vote and potential law.

Contact us at info@cpa-wfy.com to discuss how to maximize your 2017 tax benefits through comprehensive year-end tax planning.

Estate and Gift Tax 2018 Inflation Adjustments

On October 19th, the IRS issued Revenue Procedure 2017-58, the annual inflation adjustments for 2018 for many tax provisions, including exemptions for estate, gift and generation-skipping transfer (GST) taxes as well as the annual exclusion amount for gifts as follows:

Estate, Gift and GST Tax Exemption Increases to $5,600,000. For estates of decedents who pass away during 2018, and for gifts made during 2018, the combined estate and gift tax exemption will increase to $5,600,000, up from a total of $5,490,000 for estates of decedents in 2017.  The generation-skipping transfer exemption increased as well to $5,600,000. In 2018 an individual can bequeath $5,600,000 (or $11,200,000 from a married couple’s estate) to heirs and pay no federal estate or gift tax.

Gift Tax Annual Exclusion Increases to $15,000. For gifts made in 2018, the gift tax annual exclusion will increase to $15,000 from $14,000, where it has been since 2013. An individual can give to another individual up to this amount without utilizing any of the gift tax exemption.  For example, a married couple can gift each donee up to $30,000 in 2018 without utilizing either spouse’s gift tax exemption amount.

We are available to answer your estate and gift tax questions at info@cpa-wfy.com.

What to Do After the Hurricane

Those pictures you see from Hurricanes Harvey and Irma – ordinary people out there in waist-high water, rescuing both their neighbors and strangers, coming from other states and other counties – demonstrate yet again not only the resilience of Americans but our decency in reaching out to others without a thought to personal safety.

It also makes us all think: What would I do if such a natural disaster were to strike my home or business? What follows are the resources available, especially if you are in Texas or Florida. Even if you’re not in this area, you may have friends and family who are, so be sure to share this with them.

Start with FEMA

  • Federal Emergency Management Agency (FEMA) contact info for assistance — DisasterAssistance.gov allows you to apply for assistance online. When you go to the website, you will see a link for transitional assistance, which lists hotels so you can find a safe place to stay.
  • You can also call 800-621-FEMA (3362). Contact your state’s emergency management agency to find out about other resources and to get your county’s contacts. The DisasterAssistance.gov site helps with a link to a US Hospital Finder and even temporary lodging, including Airbnb, through its Disaster Response Program.

Massive property damage translates into tens of thousands of insurance claims. Most homeowners’ and renters’ insurance policies cover wind damage but not groundwater flooding. The distinction between actual flooding and storm-driven water damage can be subtle but may have important insurance implications.

While FEMA offers grants to victims, it admits that the amount is often much less than what is needed to recover.

The region affected by Harvey is underinsured — only one-sixth of homes in Harris County, Texas, whose county seat is Houston, have active National Flood Insurance policies. There are about 1.8 million housing units altogether.

What about businesses? Small businesses may be eligible for a disaster loan program through the Small Business Administration.

Based on statistics like these, it’s expected that a large portion of overall economic damage caused by flooding won’t be covered by insurance.

The Next Steps

What to do:

  1. Contact your insurance company as soon as possible to report your claim. Insurers visit the most severely damaged areas first, so be prepared to provide an accurate description of any damages.
  2. Get a claim number and write it down — it’s the quickest and easiest way for insurance companies to locate your file.
  3. Ask when you can expect to see a claims adjuster. It can be anywhere from a week to five or six months, depending on the extent of the claim.
  4. Document losses with pictures and video. Include a list of damaged personal items. Try to include the date of purchase and approximate value of any damaged items, and collect receipts. Put all of this into the cloud so it can be accessed anywhere.
  5. Keep good records of anything you spend to make immediate repairs to secure your home — don’t forget receipts from hotels and meals if you couldn’t return to your home right away.
  6. Sign up for text alerts that notify you of the status of your claim.

Other important tips:

  • If you have flood insurance, notify your provider within 60 days of damage. The National Flood Insurance Program has a step-by-step guide on how to file your flood claim.
  • Only cover broken windows or holes to keep rain out and prevent theft — don’t make permanent repairs until instructed to by your insurance company. Save all receipts.

Expect a check within five business days after your insurance company agrees to pay your claim.

Also notify your mortgage company and auto loan lender — monthly payments may be deferred for a period of time and late fees typically are waived because you’re living in an area impacted by a natural disaster.

Your area may lack power not only for days but for weeks. You may have to purchase food, medical supplies and other necessities using cash instead of credit or debit cards. Areas without power revert to a cash-only economy. Many banks and credit unions will set up mobile branches open beyond typical banker’s hours so that affected consumers can access cash or easily apply for loans needed to repair damage.

Notify your utility and cable companies so bills will be halted. You may even want to notify the three credit bureaus and the Federal Trade Commission to have a fraud alert placed on your accounts to lower the chance of becoming a victim of identity theft. Creditors often are willing to negotiate a payment plan and review your budget.

 

Moving Forward With Insurance

Once you get your immediate issues taken care of, you will probably have a lot of back-and-forth with the insurance company over the coming weeks and months. Here is what you can expect:

Unfortunately, even with the combination of FEMA, homeowners and flood coverage, not all repair costs will be paid — there will be gaps when trying to make your home the way it was before the hurricane hit. Damage caused by even a few inches of water in a 1,000-square-foot home can easily cost more than $10,000 to repair.

Insurance companies typically provide additional living expenses for hotels and meals if you can’t live in your house or conduct business while repairs are being made. You should expect to shell out your own money first, but you’ll be reimbursed for expenses within 30 days. Companies will reimburse for sump pumps, generators or supplies like wood for do-it-yourself repairs. Filing claims as soon as you can is smart just to get your name on the list. It will help you get the most from your benefits. Find out what your policy provides beyond the immediate benefits.

With some companies, you may have to do some negotiating with your adjuster about the extent of damage to some possessions. Realize, too, that the insurance company’s estimate of how much it will cost to repair your home and your own contractor’s figures may not be anywhere near comparable. Either a compromise can be hammered out or you can get a mediator to break the impasse, but that process can lengthen and complicate the rebuilding process.

Advice? Start by trusting the company, but do so warily and professionally. Keep notes of conversations and copies of correspondence and receipts. If you run into trouble with the claims department, see if there is a complaint resolution department.

Details on Tax Help

The IRS has announced that it’s providing help to victims of Hurricanes Harvey and Irma. Here are some specifics:

  • The agency is waiving the diesel fuel penalty for all of Texas in the aftermath of the hurricane. Penalty relief is provided for partnerships that filed late returns. The IRS has even offered extension filers until January 31 to file.
  • If you have a business in one of the counties that were hit hard, you may qualify for tax relief, including abatements. Quarterly estimated tax payments, as well as quarterly payroll and excise tax deposits, will be abated as long as the deposits were made by September 7. If you receive a late filing or late payment penalty notice anyway, call the IRS to have the penalty abated.
  • Know that the IRS is automatically identifying taxpayers in covered disaster areas and applying automatic filing and payment relief. But if you have a business outside the covered disaster area that was nevertheless affected, you may still be eligible for relief. Call the IRS disaster hotline at 866-562-5227 to request tax relief.
  • And what about claiming disaster-related casualty losses on your federal income tax return? You may deduct personal property losses not covered by insurance or other reimbursements. Put the disaster designation ”Texas, Hurricane Harvey” or ”Florida, Hurricane Irma” on top of your form so the IRS can expedite the processing of your refund.

Other Helpful Resources

Assistance for your business is available through a link, Other Recovery Help, accessed from DisasterAssistance.gov. Here you will find a heading that says Catalog of Federal Domestic Assistance, and if you click on it, it will allow you to search programs by state, local and even tribal entities, as well as profits and nonprofits that offer assistance.

There is a link to a National Resource Network that is composed of a diverse group of private and public sector organizations to help distressed cities and counties find and apply solutions to aid economic recovery and growth:

  • Support for implementing solutions.
  • Access to peer network and new ideas.
  • Online, on-demand access to expertise.

FEMA offers a Community Recovery Management Toolkit that can be used to find local officials and community leaders who will help manage long-term and post-disaster recovery. The toolkit offers guidance, case studies, tools and training. The information is in four sections:

  • Organization.
  • Recovery Planning.
  • Managing Recovery.
  • Core Capability-Specific Resources.

The online help offers are many and heartening. They remind us that when overwhelming disaster strikes, we’re all in it together, working alongside each other and crossing all regional boundaries. When the worst hits us, ironically, it brings out the best in us.

© Copyright 2017. All rights reserved.