With new SALT limit, IRS explains tax treatment of state and local tax refunds

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WASHINGTON — The Internal Revenue Service on Friday, March 29th clarified the tax treatment of state and local tax refunds arising from any year in which the new limit on the state and local tax (SALT) deduction is in effect.

In Revenue Ruling 2019-11 (PDF), posted on IRS.gov, the IRS provided four examples illustrating how the long-standing tax benefit rule interacts with the new SALT limit to determine the portion of any state or local tax refund that must be included on the taxpayer’s federal income tax return. Friday’s announcement does not affect state tax refunds received in 2018 for tax returns currently being filed.

The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, limited the itemized deduction for state and local taxes to $5,000 for a married person filing a separate return and $10,000 for all other tax filers. The limit applies to tax years 2018 to 2025.

As in the past, state and local tax refunds are not subject to tax if a taxpayer chose the standard deduction for the year in which the tax was paid. But if a taxpayer itemized deductions for that year on Schedule A, Itemized Deductions, part or all of the refund may be subject to tax, to the extent the taxpayer received a tax benefit from the deduction.

Taxpayers who are impacted by the SALT limit—those taxpayers who itemize deductions and who paid state and local taxes in excess of the SALT limit—may not be required to include the entire state or local tax refund in income in the following year. A key part of that calculation is determining the amount the taxpayer would have deducted had the taxpayer only paid the actual state and local tax liability—that is, no refund and no balance due.

In one example described in the ruling, a single taxpayer itemizes and claims deductions totaling $15,000 on the taxpayer’s 2018 federal income tax return. A total of $12,000 in state and local taxes is listed on the return, including state and local income taxes of $7,000. Because of the limit, however, the taxpayer’s SALT deduction is only $10,000. In 2019, the taxpayer receives a $750 refund of state income taxes paid in 2018, meaning the taxpayer’s actual 2018 state income tax liability was $6,250 ($7,000 paid minus $750 refund). Accordingly, the taxpayer’s 2018 SALT deduction would still have been $10,000, even if it had been figured based on the actual $6,250 state and local income tax liability for 2018. The taxpayer did not receive a tax benefit on the taxpayer’s 2018 federal income tax return from the taxpayer’s overpayment of state income tax in 2018. Thus, the taxpayer is not required to include the taxpayer’s 2019 state income tax refund on the taxpayer’s 2019 return.

See the ruling for details on all four examples.

Friday’s ruling has no impact on state or local tax refunds received in 2018 and reportable on 2018 returns taxpayers are filing this season. For information, including worksheets for reporting these refunds, see the 2018 instructions (PDF) for Form 1040 U.S. Individual Income Tax Return, and Publication 525, Taxable and Nontaxable Income.

 

 

*This message was distributed by IRS Newswire, an IRS e-mail service. For more information on federal taxes please visit IRS.gov.

IRS revises EIN application process; seeks to enhance security

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WASHINGTON — As part of its ongoing security review, the Internal Revenue Service announced today that starting May 13 only individuals with tax identification numbers may request an Employer Identification Number (EIN) as the “responsible party” on the application.

An EIN is a nine-digit tax identification number assigned to sole proprietors, corporations, partnerships, estates, trusts, employee retirement plans and other entities for tax filing and reporting purposes.

The change will prohibit entities from using their own EINs to obtain additional EINs. The requirement will apply to both the paper Form SS-4, Application for Employer Identification Number, and online EIN application.

Individuals named as responsible party must have either a Social Security number (SSN) or an individual taxpayer identification number (ITIN). By making the announcement weeks in advance, entities and their representatives will have time to identify the proper responsible official and comply with the new policy.

The Form SS-4 Instructions provide a detailed explanation of who should be the responsible party for various types of entities. Generally, the responsible party is the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. In cases where more than one person meets that definition, the entity may decide which individual should be the responsible party.

Only governmental entities (federal, state, local and tribal) are exempt from the responsible party requirement as well as the military, including state national guards.

There is no change for tax professionals who may act as third-party designees for entities and complete the paper or online applications on behalf of clients.

The new requirement will provide greater security to the EIN process by requiring an individual to be the responsible party and improve transparency. If there are changes to the responsible party, the entity can change the responsible official designation by completing Form 8822-B, Change of Address or Responsible Party. A Form 8822-B must be filed within 60 days of a change.

 

*This message was distributed by IRS Newswire, an IRS e-mail service. For more information on federal taxes please visit IRS.gov.

Tax reform brought significant changes to itemized deductions

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Tax law changes in the Tax Cuts and Jobs Act affect almost everyone who itemized deductions on tax returns they filed in previous years..  One of these changes is that TCJA nearly doubled the standard deduction for most taxpayers. This means that many individuals may find it more beneficial to take the standard deduction. However, taxpayers may still consider itemizing if their total deductions exceed the standard deduction amounts.

Here are some highlights taxpayers need to know if they plan to itemize deductions:

Medical and dental expenses
Taxpayers can deduct the part of their medical and dental expenses that’s more than 7.5 percent of their adjusted gross income.

State and local taxes
The law limits the deduction of state and local income, sales, and property taxes to a combined, total deduction of $10,000. The amount is $5,000 for married taxpayers filing separate returns. Taxpayers cannot deduct any state and local taxes paid above this amount.

Miscellaneous deductions
The new law suspends the deduction for job-related expenses or other miscellaneous itemized deductions that exceed 2 percent of adjusted gross income. This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel.

Home equity loan interest
Taxpayers can no longer deduct interest paid on most home equity loans unless they used the loan proceeds to buy, build or substantially improve their main home or second home.

More information:
• Publication 5307, Tax Reform: Basics for Individuals and Families
• Publication 501, Standard Deduction, and Filing Information
• Schedule A, Itemized Deductions
• IRS Tax Map

IRS YouTube Videos:
• Interactive Tax Assistant – English | ASL

 

*This message was distributed by IRS Tax Tips, an IRS e-mail service. For more information on federal taxes please visit IRS.gov.

IRS expands penalty waiver for those whose tax withholding and estimated tax payments fell short in 2018; key threshold lowered to 80 percent

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The Internal Revenue Service today provided additional expanded penalty relief to taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

The IRS is lowering to 80 percent the threshold required to qualify for this relief. Under the relief originally announced Jan. 16, the threshold was 85 percent. The usual percentage threshold is 90 percent to avoid a penalty.

“We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” said IRS Commissioner Chuck Rettig. “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

This means that the IRS is now waiving the estimated tax penalty for any taxpayer who paid at least 80 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two.

Today’s revised waiver computation will be integrated into commercially-available tax software and reflected in the forthcoming revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

Taxpayers who have already filed for tax year 2018 but qualify for this expanded relief may claim a refund by filing Form 843, Claim for Refund and Request for Abatement and include the statement “80% Waiver of estimated tax penalty” on Line 7.  This form cannot be filed electronically.

Today’s expanded relief will help many taxpayers who owe tax when they file, including taxpayers who did not properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017.

The IRS and partner groups conducted an extensive outreach and education campaign throughout 2018 to encourage taxpayers to do a “Paycheck Checkup” to avoid a situation where some might have had too much or too little tax withheld when they file their tax returns. If a taxpayer did not submit a revised W-4 withholding form to their employer or increase their estimated tax payments, they may have not had enough tax withheld during the tax year.

Additional information

Because the U.S. tax system is pay-as-you-go, taxpayers are required, by law, to pay most of their tax obligation during the year, rather than at the end of the year. This can be done by either having tax withheld from paychecks or pension payments, or by making estimated tax payments.

Usually, a penalty applies at tax filing if too little is paid during the year. This penalty is an interest based amount approximately equivalent to the federal interest on the amount not paid in a timely manner. Normally, the penalty would not apply for 2018 if tax payments during the year met one of the following tests:

  • The person’s tax payments were at least 90 percent of the tax liability for 2018 or
  • The person’s tax payments were at least 100 percent of the prior year’s tax liability, in this case from 2017. However, the 100 percent threshold is increased to 110 percent if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return.

For waiver purposes only, today’s relief lowers the 90 percent threshold to 80 percent. This means that a taxpayer will not owe a penalty if they paid at least 80 percent of their total 2018 tax liability. If the taxpayer paid less than 80 percent, then they are not eligible for the waiver and the penalty will be calculated as it normally would be, using the 90 percent threshold. For further details, see Notice 2019-25, posted today on IRS.gov.

Like last year, the IRS urges everyone to take a Paycheck Checkup and review their withholding for 2019. This is especially important for anyone now facing an unexpected tax bill when they file. This is also an important step for those who made withholding adjustments in 2018 or had a major life change to ensure the right tax is still being withheld. Those most at risk of having too little tax withheld from their pay include taxpayers who itemized in the past but now take the increased standard deduction, as well as two-wage-earner households, employees with nonwage sources of income and those with complex tax situations.

To help taxpayers get their withholding right in 2019, the updated Withholding Calculator is now available on IRS.gov.

 

*This message was distributed by IRS Newswire, an IRS e-mail service. For more information on federal taxes please visit IRS.gov.

Phony IRS calls increase during filing season

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The tax filing season is a busy time for taxpayers, but scammers also stay busy. Taxpayers should be aware of several types of tax scams, but phone scams start to increase during the beginning of tax season and then remain active throughout the remainder of the year. Here’s how this scam generally works:

  • Scammers impersonating the IRS call taxpayers telling them they owe taxes and face arrest if they don’t pay.
  • The scammer may leave a message asking taxpayers to call back to clear up a tax matter or face arrest.
  • When taxpayers call back, the scammers often use threatening and hostile language.
  • The thief demands that the taxpayers pay their tax debts with a gift card, other pre-paid cards or a wire transfer.

Taxpayers who receive these phone calls should:

Taxpayers should remember that the IRS does not:

  • Call taxpayers demanding immediate payment using a specific payment method. Generally, the IRS first mails a bill to the taxpayer.
  • Threaten to have taxpayers arrested for not paying taxes.
  • Demand payment without giving taxpayers an opportunity to question or appeal the amount owed.

IRS YouTube Videos:
Tax Scams – English | Spanish | ASL
Dirty Dozen – English | Spanish | ASL

 

*This message was distributed by IRS Tax Tips, an IRS e-mail service. For more information on federal taxes please visit IRS.gov.

IRS’ 2019 “Dirty Dozen” tax scams list highlights inflating deductions, credits

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IRS YouTube Videos:

IR-2019-36, March 12, 2019

WASHINGTON — The Internal Revenue Service today warned taxpayers to avoid falsely inflating deductions or credits on tax returns as part of its 2019 list of the “Dirty Dozen” tax scams.

Taxpayers should watch for areas frequently targeted by unscrupulous tax preparers include overstating deductions such as charitable contributions, medical expenses, padding business expenses or falsely claiming the Earned Income Tax Credit, Child Tax Credit and other tax benefits. Some taxpayers who prepare their own returns, as well as those who use unscrupulous preparers, may also pad their deductions and credits to inflate their refund or lower their tax bill.

Padding deductions and credits is part of this year’s “Dirty Dozen” list of common tax scams. Taxpayers may encounter these schemes any time, but many of them peak during the tax filing season as people prepare their tax returns or hire others to help with their taxes.

The IRS reminds taxpayers that they are still personally at risk, even if someone suggests using these strategies or a paid tax preparer actually prepares their return. By the time the IRS contacts the taxpayer about these problems, the promoter or preparer is often long gone.

Avoids scams, file an accurate return

Preparing an accurate tax return is a taxpayer’s best defense against scams – and the best way to avoid triggering an audit. Significant penalties may apply to those who file incorrect returns including:

  • 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
  • $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” This is a return that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
  • In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the tax return resulted from tax fraud.

Taxpayers may be subject to criminal prosecution and be brought to trial for actions such as willful failure to file a return; supply information; or pay any tax due; fraud and false statements; preparing and filing a fraudulent return and identity theft.

One way for taxpayers to ensure they file an accurate tax return and claim only the tax benefits they’re eligible to receive is by using tax preparation software. Question and answer formats lead taxpayers through each section of the tax return.

Taxpayers should also remember they can prepare and e-file federal taxes free with IRS Free File. Taxpayers with income of $66,000 or less can file using free brand-name tax software. Those who earned more can use Free File Fillable Forms, the electronic version of IRS paper forms. Either way, everyone has a free e-file option. The only way to access Free File is on IRS.gov.

Community-based volunteers around the country also provide free face-to-face tax assistance to qualifying taxpayers. Volunteers help taxpayers file taxes correctly, claiming only the credits and deductions they’re entitled to by law.

Remember, taxpayers are legally responsible for what is on their tax return, even if it is prepared by someone else.

www.irs.gov/chooseataxpro has additional information to help taxpayers including tips on choosing a preparer, the differences in credentials and qualifications, as well as how to submit a complaint regarding an unscrupulous tax return preparer.

More information about IRS audits, the balance due collection process and possible civil and criminal penalties for noncompliance is available at the IRS website.

 

*This message was distributed by IRS Tax Tips, an IRS e-mail service. For more information on federal taxes please visit IRS.gov.

Here’s how tax reform affects taxpayers who claim the child tax credit

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Many people claim the child tax credit to help offset the cost of raising children. Tax reform legislation made changes to that credit for 2018 and later. Here are some important things for taxpayers to know.

Credit amount. The new law increases the child tax credit from $1,000 to $2,000. Eligibility factors for the credit have not changed. As in past years, a taxpayer can claim the credit if all of these apply:

  • the child was younger than 17 at the end of the tax year
  • the taxpayer claims the child as a dependent
  • the child lives with the taxpayer for at least six months of the year

Credit refunds. The credit is refundable, now up to $1,400. If a taxpayer doesn’t owe any tax before claiming the credit, they will receive up to $1,400 as part of their tax refund.

Earned income threshold. The income threshold to claim the credit has been lowered to $2,500 per family. This means a family must earn a minimum of $2,500 to claim the credit.

Phaseout. The income threshold at which the child tax credit begins to phase out is increased to $200,000, or $400,000 if married filing jointly. This means that more families with children younger than 17 qualify for the larger credit.

New credit for other dependents. Dependents who can’t be claimed for the child tax credit may still qualify for the new credit for other dependents.  This is a non-refundable credit of up to $500 per qualifying person. These dependents may also be dependent children who are age 17 or older at the end of the tax year. It also includes parents or other qualifying relatives supported by the taxpayer.

 

*This message was distributed by IRS Tax Tips, an IRS e-mail service. For more information on federal taxes please visit IRS.gov.

Ten things for taxpayers to think about when choosing a tax preparer

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It’s the time of the year when many taxpayers choose a tax preparer to help file a tax return. These taxpayers should choose their tax return preparer wisely.  This is because taxpayers are responsible for all the information on their income tax return. That’s true no matter who prepares the return.

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Can your tax clients claim dependents who reside in Mexico?

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Original article written by LatinoTaxPro.org

The Tax Cuts & Jobs Act has created massive changes across the Internal Revenue Code. One of the most impactful of these changes is the reduction of the personal exemption to $0. In previous years, the personal exemption reduced taxable income which in turn reduced the amount of tax owed. As more personal exemptions are made, less taxable income is generated, and thus less tax is paid. An exemption was allowed for any qualifying dependent, including those who lived in Mexico. Now that the exemption amount is $0 however, can you still claim dependents in Mexico?

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IRS kicks off 2019 tax-filing season as tax agency reopens; Use IRS.gov to avoid phone delays

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WASHINGTON ― The Internal Revenue Service successfully opened the 2019 tax-filing season today as the agency started accepting and processing federal tax returns for tax year 2018. Despite the major tax law changes made by the Tax Cuts and Jobs Act, the IRS was able to open this year’s tax-filing season one day earlier than the 2018 tax-filing season.

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