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April 2019

Elected Farm Income May be Used to Figure QBI

The IRS has explained how farmers and fishermen who use the income averaging method compute their Section 199A qualified business income (QBI) deduction. One of the requirements for qualified items of income, gain, deduction and loss is that the item is "included or allowed in determining taxable income for the tax year.” In a post on its website on April 19, the IRS said in figuring the QBI deduction, income, gains, losses and deductions from farming or fishing should be taken into account, but only to the extent that the deduction is attributable to your farming or fishing business and is included in elected farm income on line 2a of Schedule J (Form 1040).

https://www.irs.gov/forms-pubs/elected-farm-income-may-be-used-to-figure-qualified-business-income-deduction-19-apr-2019

 


Advising SALT “Economic Refugees”—Buy Boots and a Hat!

William Stromsem, Assistant Professor, George Washington University

The April 15 tax filing deadline brought home the reality of the state and local tax (SALT) deduction limits to many high-income, high-net worth individuals in California, New York, New Jersey, Connecticut, Maryland, D.C. and other high tax states. With SALT rates sometimes exceeding 10% of income and real estate taxes around 1% of assessed value, the $10,000 limit on federal SALT deductions has resulted in additional federal income taxes of $10,000 or more. (The average SALT deduction for citizens of the states mentioned above is around $20,000, but those with higher income and real estate taxes could easily top $50,000 where a 30% federal tax rate could cost $15,000 for the year.) Many who had not used the standard deduction for decades took the higher federal standard deduction rather than itemizing, adding “salt” to the wounds as charitable contributions and other deductible expenses yielded no tax benefit. 

Several states have sued the federal government. Their representatives in Congress are seeking to change the law and governors have proposed workarounds, such as state deductions for charitable contributions to state universities. However, the lawsuits do not seem to be progressing. In addition, the proposed legislation has political complications. The IRS shot down some of the proposed workarounds in IR-2018-172 by alerting taxpayers and the various states they would be policing quid pro quo arrangements that seek to substitute charitable contributions for SALT deductions. The states are facing pressure to cut taxes now that the SALT taxes are only partially deductible for many taxpayers. Real estate markets are softening, with formerly hot markets in the New York area cooling so much that realtors are seeking buyers rather than buyers seeking houses. States are losing revenue as the caravan of “SALT refugees” grows.

The added cost of taxes, coupled with virtual work arrangements becoming more common, has caused some to pack up and move to a better life in the few states that do not tax individual income—Texas, Florida, Nevada, South Dakota, Washington, Alaska and Wyoming—with Texas and Florida receiving the most SALT refugees.

The states are not giving up their tax base easily. Some states—particularly New York and California—are aggressively performing residency audits to ensure taxpayers have sufficiently severed nexus. High tax bracket taxpayers are more likely to be impacted by such an audit. Preparers advising a recently settled SALT refugee should provide advice on how to evidence their severance with their former state, particularly if they retain a home there or commute there. Regardless of the new state of residence, taxpayers will still have to pay tax on income sourced within their former states.

In general, the former state will look at time spent in the new state versus the old one. Some states aggressively claim that if you cannot prove you were out of the state for a day, you are presumed to be in the former state for that day. Emigres should keep records of days in Texas versus the former state, including airline tickets, gas receipts and calendars with notations or other evidence to show when they were in Texas. Get a clean cutoff date of when residency is established in Texas, since you will need to allocate prior income to the former state. Save documents to help prove your Texas residency. 

Here are some items that may be helpful in showing Texas residency:

  • Obtain a Texas driver’s license.
  • Consider selling your old home and using temporary quarters when you visit the old state. Consider buying in Texas instead of renting. Some states presume that if you retain a residence in the former state, you are only temporarily out of the state.
  • Stop state income tax withholding and estimated tax payments to the former state, if appropriate. This places the collection burden on the state, rather than placing the refund burden on the taxpayer.
  • Open a bank account, register to vote and register your car in Texas.
  • Charge items in Texas to create evidence of presence in Texas.
  • Change your billing address to Texas for other mail such as magazine subscriptions, even if you have mail forwarded from your former state.
  • Get a library card, and/or fishing or hunting license.
  • If you are a professional, get re-licensed in Texas or at least join local professional associations (such as TXCPA).
  • Hire a group of local professionals—CPA, doctor, dentist, lawyer, investment adviser, etc.
  • Join a local country club.
  • Consult residency audit guidelines for your former state, if available.
  • And finally, buy some Texas boots!

House Passes IRS Reform Legislation

 

On April 9, the House passed by a voice vote H.R. 1957, “Taxpayer First Act of 2019.” The bill had bipartisan support in the House and appears to have bicameral support, as well. The Senate Finance Committee is considering an identical bill in S. 928.

H.R. 1957 would modify requirements to the IRS’ organizational structure, customer service procedures and training, enforcement procedures, information technology and electronic systems. It includes the following provisions:

·         establish an independent IRS appeals office;

·         require the commissioner to appoint a chief information officer;

·         establish a response deadline to the National Taxpayer Advocate’s directives;

·         notify Congress 90 days before a proposed closure of a Taxpayer Assistance Center;

·         develop a comprehensive customer service strategy;

·         continue the IRS Free File Program;

·         exempt certain low-income taxpayers from offer-in-compromise payments and from referral to the IRS’ private debt collection program;

·         modify tax enforcement procedures on property seizures, summons, joint liability and third-party contact;

·         modify whistleblowers procedures;

·         update cybersecurity and identity protection requirements;

·         provide a single point of contact for tax-related identity theft victims;

·         within five years, offer identity protection personal identification numbers nationwide;

·         allow the IRS to require additional taxpayers to file electronically; 

·         require partnerships having more than 100 partners to file returns on magnetic media;

·         waive the electronic filing requirement for certain preparers in areas without internet access;

·         require mandatory e-file by exempt organizations, but provide notice before revoking an exempt status for failure to file return;

·         implement internet platforms for Form 1099 filings and for third-party income verification;

·         develop uniform standards for the acceptance of electronic signatures;

·         streamline critical pay authority for the IRS’ information technology positions;

·         ensure that contractors comply with confidentiality safeguards; and

·         prohibit the rehiring of certain IRS employees removed for misconduct.

 

As an offset, the legislation would increase the penalty for failing to file a tax return and for improper disclosure or use of information by return preparers.

 


Penalty Waivers for Underpayment of Tax

In Notice 2019-25, the IRS expands its penalty waiver for underpayment of 2018 withholdings and estimated tax payments if those payments equaled at least 80 percent of the tax due upon filing the federal return. In prior Notice 2019-11, the penalty was waived only if at least 85 percent of the tax was paid prior to filing.

Any taxpayer eligible for the additional relief who has already filed his/her return can claim a refund of the penalty amount by filing Form 843 and completing Line 7 with the statement, “80% waiver of estimated tax penalty.”

Late February, “qualified” farmers and fishermen also received an underpayment penalty waiver. Prior to Notice 2019-17, these taxpayers were required to make one estimated installment payment by Jan. 15 of the year following the taxable year or file their return by March 1. The notice waives the underpayment penalty for these businesses if they file their 2018 tax return and pay the full amount due by April 15.

https://www.irs.gov/pub/irs-drop/n-19-25.pdf

https://www.irs.gov/pub/irs-drop/n-19-17.pdf