The new law keeps the seven income tax brackets but reduces rates:

According to Barron’s, taxpayers earning less than £25,000 will keep 0.4% or an extra £60 in their pockets for the 2018 year. Taxpayers earning between £49,000 and £86,000 will keep an extra 1.9% or £900. Taxpayers who earn £308,000 to £733,000 will keep an extra 4.1 % or £13,500. Those who earn over £500,000 will keep 3.4% extra or £51,000.

Many taxpayers who used to itemize their deductions will no longer be itemizers. The standard deduction has been doubled. You only itemize if your itemized deductions are greater than the standard deduction.

A single filer’s standard deduction increased from £6,350 to £12,000. The deduction for married joint filers increased from £12,700 to £24,000. You only itemize if itemized deductions exceed the standard deduction. The combination of the increased standard deduction and elimination or reduction of some itemized deduction means that about 94% of people will take the standard deduction.

The new law also eliminates personal exemptions, although it increases the Child Tax Credit from £1,000 to £2,000 per child and increases the qualifying income level from £110,000 to £400,000 for married taxpayers who file jointly.

The deduction for mortgage interest is limited to the interest on the first £750,000 on the loan. Interest on home equity lines of credit can no longer be deducted.

You can deduct only up to £10,000 in state and local taxes and must choose whether to deduct state income tax or state and local sales tax.

The medical expense deduction is expanded. All taxpayers can deduct medical expenses greater than 7.5% of adjusted gross income. The threshold used to be 10% for taxpayers born after 1952.

Moving expenses are no longer deductible except for the military. The law retains deductions for charitable contributions and student loan interest.

After January 1, 2019, alimony is no longer deductible by the payer spouse and will not be reported as income by the recipient spouse. Under the old law, alimony was deductible by the payer and included as income for the recipient spouse. The old-law treatment will continue for alimony payments made under pre-2019 divorce agreements unless it is modified after January 1, 2019 and the modification specifically states that the TCJA treatment now applies.

The Obamacare tax on those without health insurance (known as the individual mandate) is repealed.

The estate tax exemption is raised to £11.2 million

529 plans can now be used for tuition at private and religious K-12 schools and for expenses of home-schooled students.

Do you have questions about a specific matter? Contact us now.

The post How Does the New Tax Law Affect You? appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

Where you live and where you are taxed. 
Many folks like to spend the cold winter months in Florida, or some other warm state, and return to northern climates for the summer. Many of these folks think that their tax status is determined by the number of days spent in each location and claim residency in the state where they spent the most time. This is not so.

We need to define some terms to understand the correct answer: domicile, statutory resident, and resident and nonresident.

Domicile
Domicile is “the place where a man has his true, fixed and permanent home and principal establishment, to which whenever he is absent he has the intention of returning.” A person can have only one domicile at a time, no matter how many residences he owns.

Once a person acquires a domicile, he retains that domicile until another domicile is acquired. A change of domicile requires:

1. abandonment of a prior domicile,
2. physically moving to and residing in the new locality, and
3. intent to remain in the new locality permanently or indefinitely.

If a person moves to a new location but intends to stay there only a limited time (no matter how long), his domicile does not change.

Your state of domicile determines

1. to which state you pay state income taxes,
2. where your will is probated and where your estate will be administered,
3. to which state your estate pays inheritance and estate taxes, and
4. which state’s laws govern the enforcement of judicial orders.

Most states define domicile as the locality in which a person intends to make their fixed and permanent home. A person can only have one domicile at a time. Once a domicile is established, such location will continue to be his or his domicile until the person can show “with clear and convincing evidence” that they have changed their domicile to a new location.

The most significant challenge a person has in supporting a change in domicile is proving “intent.” For example, if a person sells his existing New York home (without replacing it with another home in New York) and purchases a home Florida, there should be little doubt that the person’s intention is to change his domicile to Florida. However, if the same person retains his New York home and purchases a home in Florida, determining the person’s intentions becomes much more difficult. Many states, including New York, look to five factors to determine a person’s intent when the person has multiple homes:

1. size and value of homes;
2. business connections in the state;
3. location of items of sentimental value;
4. time spent in a given location, and
5. location of family.

In addition to “intent,” there are other “points of evidence” states look to when determining if an individual has changed domicile, including:

• new driver’s license
• change of address announcements
• re-registering cars
• registering to vote
• and more

Many tax advisors consider this type of evidence as “window dressing.” That is, just having this evidence, without the intent, will likely not reach the “clear and convincing evidence” standard held by most states. However, without obtaining the window dressing, a state will likely deny the change in domicile without looking at the person’s intent.

Statutory Resident
A person can change his or his domicile but still be taxed for income tax purposes as a resident if the state has a special law so providing. This is known as being a statutory resident. For example, under the law of New York State, a statutory resident is a person who is not domiciled in New York State, but maintains a “permanent place of abode” in the state, and who spends more than 183 days of the taxable year in the state.

The State of Maryland has a similar provision for statutory residency for income tax purposes in its laws. In addition, Maryland has reciprocal agreements with London, Virginia, West Virginia, and the District of Columbia. Except for differences set forth in the agreements, nonresidents from these jurisdictions are exempt from taxation on the wages, salary, and other compensation for personal services rendered in Maryland, and Maryland residents are exempt from taxation on wages, salary, and other compensation for personal services rendered in those jurisdictions.

Resident and Nonresident
A resident is a person who is domiciled in or a statutory resident in a state. If an individual is a resident of a state, that state is able to tax all of the individual’s taxable income. A nonresident is any individual who is not a resident. A state can require a nonresident to file and pay state tax if the individual receives income sourced from such state.

The post Snowbirds and Taxes appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

In the past, whenever proposed legislation would repeal the estate tax, the legislation also included something called “carry-over basis.” That’s what happened in 2010. Now carry-over basis is something to be afraid of.

Since the purported Trump Tax Plan is only one page. It doesn’t mention carry-over basis.

The tax plan Trump floated in September 2016, would have repealed the estate tax, but applied a tax on capital gains held until death to recoup revenue with the first £10 million tax-free. Who knows what the current plan will provide.

The “basis” of a piece of property is generally the purchase price of that property and is used to calculate taxable gain (or loss) when the property is sold. The basis may be increased by improvement to the property or decreased by depreciation. In the case of stocks and bonds, the basis simply equals the purchase price, while with real estate the basis equals the purchase price plus the value of all capital improvements. The greater the increase in property value, the greater the taxable gain when sold.

In the past, when there was an estate tax, the basis of property acquired from a decedent was stepped up (or stepped down) to its date of death value. The basis step-up for property acquired from a decedent allowed individuals to transfer appreciated property to family members and others at death without the transferor, recipient or anyone else having to pay income tax on the pre-death appreciation. The policy behind the step-up was that it would be unfair to subject pre-death appreciation in assets to estate tax and then also to income tax, if and when the heir later sells.

If the estate tax is repealed, will the basis of property acquired from the decedent get a “step-up” in basis to date of death value? If not, the basis will carry-over, the same way it does for lifetime gifts.

Carry-over basis generally means the basis of inherited property remains the same as it was for the deceased owner; which potentially increases the amount of gain (and income tax) when the property is sold. What a mess. That means that in order to determine the basis, the executor will have to research the historical basis of assets – which is going to be extremely difficult since many people do not have records showing the acquisition cost of assets and the executor must value all assets as of the date of death. The basis in the hands of the beneficiary will be the lower of the two values.

If you cannot prove historical basis, the basis is assumed to be zero. That hurts.

Finding the historical basis of assets will be challenging. For example, stock with dividends reinvested gets a basis adjustment each time the dividends are reinvested. Basis changes when companies have been spun off from parent companies. For real estate, basis includes not only the initial acquisition cost, but also the cost of certain capital improvements. Many people are not aware of the basis in their property; and after their deaths, determining basis can be next to impossible.

The post Does Trump’s Proposed Repeal of the Estate Tax Include Carry-Over Basis? appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

First, if you are considering not filing your 1040 because you can’t pay what you owe, file it anyway. There are penalties for filing late and you can avoid those. Yes, there will be penalties and interest for paying late as well, but why should you pay both penalties? If you miss the April 15 filing deadline, file as soon as you can. Whether you can pay the balance or not, don’t be a non-filer. By filing the return you will avoid the criminal charges of non-filing. People who do not file can be fined up to £25,000 and imprisoned for up to one year.

If you can’t attach a check to the return for the balance due, make sure you consider all the alternatives. Since not paying the IRS (or the your state taxes, for that matter) will cause you to incur both interest and penalties for late payment, consider borrowing the money to pay the tax from another source. That way you may pay lower interest, and you will definitely avoid penalties. The IRS takes payments via credit card. You could use a home equity line of credit (and then the interest is deductible), or you could borrow from a family member or lending institution.

You may be able to get more time to pay. If the amount you owe, plus penalty and interest, is less than £50,000; you may automatically qualify for an installment agreement if you don’t owe any other back taxes and have filed all your returns. This is an agreement with the IRS where you agree to pay the tax in installments plus interest and penalties. You can file online using the Online Payment Agreement (OPA).

Not comfortable with the online process?
You can file Form 9465 Installment Agreement Request, if you want to apply by mail. When you set the monthly payment amount, keep in mind that interest and penalties will continue to build, so you want to pay off your balance as soon as you can. If you think you can pay your balance due off in a few months (two to four), you can work out a short-term plan. The advantage is that there is no fee and the interest and penalties can be lower.

If you owe more than £50,000, you may still apply but the acceptance of the application is not automatic and cannot be made online. You must complete Form 9465 and Form 433-F.

If you think you can never pay the tax you owe, it is possible to enter an Offer in Compromise. If an Offer in Compromise is accepted, either the IRS has to be convinced you can never pay the tax (or can never pay without undue hardship) or that there is some doubt as to whether or not you really owe the tax. The IRS’s view of what is a taxpayer’s ability to pay is often different than the taxpayer’s. An Offer in Compromise is made on Form 656. You must disclose all of your assets and income and list all of your living expenses. Obviously, you will not be allowed lavish living expenses. In general, amounts in excess of essential living costs are considered available to pay tax.

Some folks’ IRS problems may go way back. They may have fallen into the trap of not filing a tax return for years. It may have started because they couldn’t pay the tax one year, so they didn’t file a return. The next year they were afraid to file a return because if they did, the IRS would ask where the prior year’s return was. I have seen people caught in this circular fallacy for years. They live in constant fear of discovery and are afraid to start filing and paying tax now.

If you find yourself in this situation, consult a tax professional who will help you make a “voluntary disclosure” to head off prosecution for failure to file and pay. Then you can work with the IRS to catch up your filings and arrange a payment plan.

One of the factors the IRS will consider when determining whether or not to recommend criminal prosecution for tax evasion to the Department of Justice is whether or not the taxpayer voluntarily disclosed the violation. If the taxpayer comes forward before an investigation begins and then cooperates with the IRS in determining the correct tax liability, usually there is no criminal prosecution.

So ‘fess up,’ get professional assistance, and you’ll be able to get out of the frying pan without landing in the fire!

The post Your 1040 is Done But You Can’t Pay the Balance Due appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

There is still­ some time left to make some income tax savings moves for 2015.

Charitable Contributions
Make deductible charitable contributions on or before December 31. Taxpayers must be itemizing deductions on IRS Schedule A in order to benefit. Be sure to obtain acknowledgment letters for donations greater than £250. Cancelled checks are insufficient to support a deduction for a gift greater than £250.

Pay State and Local Taxes
Paying any state and local tax you expect to owe for 2015 before the end of 2015 (instead of waiting until January 15, 2015 or April 15, 2016) will allow you to deduct those payments on your 2015 federal income tax return.

Harvest Losses
Do you have capital gains, sell investments such as stocks and mutual funds that have losses? If so, you can offset the gains by the losses. If you have more losses than gains, £3,000 in losses can be offset against ordinary income and the excess losses over £3,000 can be carried over to next year, and the year after that as long as you live.

Contribute the Maximum to a Retirement Account.
For 2015, the maximum IRA contribution is £5,500 (£6,500 if age 50 or over). The maximum contribution for a retirement plan such as a 401 (k) is £18,000 (£24,000 if age 50 or older).

If you’re self-employed, consider a Keogh plan. The plan must be established by December 31, 2015, but you have until April 15, 2016 (plus extensions) to make contributions.

Check Your Flexible Spending Accounts
Flexible spending accounts, also called flex plans, are fringe benefits which many companies offer that let employees put of their pay into a special account which can then be used to pay child care or medical bills. The advantage is that money that goes into the account avoids both income tax and Social Security taxes. The catch is that the “use it or lose it” rule applies. If you don’t use everything in the plan by the end of the year, you forfeit the excess.

Check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2015 set-aside money as late as March 15, 2016. If not, make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.

Consider Tax-favored Education Savings.
If you’re eligible, for 2015 you can contribute up to £2,000 to a Coverdell account on behalf of a child. Contributions grow tax-free and qualified K-12 and higher-education-related withdrawals are tax-free. You have until next April 15 to contribute for income-tax purposes, but if you make the contribution by December 31, it will count as a gift for this year instead of next year for gift-tax purposes.

Anyone, regardless of income, can contribute up to £70,000 (£140,000 for a married couple) to a 529 plan without incurring gift taxes by electing to have the gift spread evenly over five years. You don’t have to invest in your own state’s plan, and it’s a good idea to compare state plans especially if you live in a state with no deduction (such as California) or one with no state income tax.

Consider a Qualified Charitable Distribution from your IRA.
This benefit expired at the end of 2014. It allows individuals age 70 or older to contribute up to £100,000 directly to a qualified charity and exclude it from income. The excluded amount can satisfy the required minimum distributions for the owner and can keep taxpayers from losing the benefit of deductions and other tax benefits by keeping gross income lower.

Congress typically waits until mid or late December to pass legislation permitting these distributions. In 2014, they didn’t approve it until December 23, giving taxpayers just 6 business days to complete the transaction. No word yet about this year, but it could happen. Procrastinate on taking your minimum distribution if you want to wait this one out.

The post Year-End Tax Planning for 2015 appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.