Individuals are always looking for tax deductions that can reduce their tax liability. But what is the actual tax benefit derived from a tax deduction? There is no straightforward answer because some deductions are above the line, others must be itemized, some must exceed a threshold amount before being deductible, and certain ones are not deductible for alternative minimum tax purposes, while business deductions can offset both income and self-employment tax. In other words, there are many factors to consider, and the tax benefits differ for each individual, depending on his or her particular situation and tax bracket.
For most non-business deductions, the savings are based upon your tax bracket. For example, if you are in the 12% tax bracket, a $1,000 deduction would save you $120 in taxes. On the other hand, if you are in the 32% tax bracket, the $1,000 deduction will save you $320 in taxes. Even so, if your taxable income is close to transitioning into the next-lower tax bracket, the benefit will be lower. You also need to consider whether the particular deduction is allowed on your state return and what your state tax bracket is to determine the total tax savings. Currently, the maximum federal tax bracket is 37%, meaning the most benefit that can be derived from a $1,000 income tax deduction is $370. Some individuals justify making discretionary purchases just because they are tax-deductible. Even in the highest tax bracket, you are still paying $630 out of pocket ($1,000 − $370), so it does not make sense to incur a tax-deductible expense just for the tax deduction.
If you are a business owner who is accustomed to treating clients to sporting events, golf getaways, concerts and the like, you were no doubt saddened by the part of the tax reform that passed last December that did away with the business-related deductions for entertainment, amusement or recreation expenses, beginning in 2018. You can still entertain your clients; you just can’t deduct the costs of doing so as a business expense.
While the ban on deducting business entertainment was quite clear in the revised law, a lingering question among tax experts has been whether the tax reform’s definition of entertainment also applied to business meals, such as when you take a customer or business contact to lunch. Some were saying yes, and others no. Either way, both sides recommended keeping the required receipts and documentation until the issue was clarified.
As technologies advance and real estate costs increase, more and more companies are moving towards allowing workers to telecommute. With the advantages of having remote employees, comes the question of how these employees interact with the company resources. While many companies choose to provide workers with computers and cellular phones, technology allowances have also become a method by which companies request that the employee provide his or her own technology. Additionally, many workers prefer to utilize their own devices for work, even if the company does not provide reimbursement. Many companies have welcomed this drive in their employees as it lowers their own costs, as well as provides an increase in productivity. With any remote system accessing company data, security and legal compliance become risk factors that must be analyzed.
Under prior tax law, taxpayers who itemized deductions could deduct “qualified residence interest” on up to $1 million of debt secured by a qualified residence and used to acquire, build or improve that residence (referred to as “acquisition debt”), plus interest on home equity debt up to $100,000. (The limits were half those amounts for married taxpayers filing separately.) The home equity debt couldn’t exceed the fair market value (FMV) of the home reduced by the debt used to acquire the home.
But the $100,000 limit didn’t apply to the extent the home equity debt qualified as acquisition debt. For example, if the home equity debt was used to improve the home securing that debt, the $100,000 limit didn’t apply.
This month we travel to the Great Plains state of North Dakota. It is the 19th largest in area, the 4th smallest by population, and also the 4th most sparely populated of the 50 states. North Dakota is situated near the middle of North America with a stone marker in Rugby, North Dakota marking the “Geographic Center of the North American Continent.”
The western half of the state consists of the hilly Great Plains as well as the northern part of the Badlands, which are to the west of the Missouri River. The region is abundant in fossil fuels including natural gas, crude oil and lignite coal. The Missouri River forms Lake Sakakawea, the third largest artificial lake in the U.S.
If you’re a college student (or the parent of one), you should know about some key tax breaks that are available to you when you do your taxes. There are two tax credits for higher education. They’re targeted at different types of students, so it pays to know the differences.
American Opportunity Credit
This credit is for students who are earning their undergraduate degrees. The credit is specifically limited to those expenses incurred in the first four years of college. The credit is worth $2,500; the really good news is that $1,000 of that is refundable, meaning you could get that back as a refund even if you don’t owe any taxes. There’s an $80,000 income ceiling for single filers to qualify for the credit ($160,000 if you’re married filing jointly). If income is more than those amounts, the credit starts to decrease. The credit is available through the 2017 tax year.
If you are a high-income professional who is excluded from the new pass-through deduction because you are in a specified service trade or business (SSTB), you may be able to use retirement plan contributions as a work-around so that you can benefit from that new 20% deduction.
An SSTB generally includes the following trades or businesses:
- Health (services by physicians, nurses, dentists, veterinarians, and other similar health care providers, although this does not apply to spas and health clubs)
- Actuarial science
- Performing arts (but this does not apply to the services of others in the industry, such as promoters and broadcasters);
- Financial services
More than a year ago, Congress passed law HR 22. It resulted in IRC section 7345 “Revocation or denial of passport in case of certain tax delinquencies”
This is a far-reaching law which covers all taxpayers owing more than $50,000 in back taxes. The intent of the taxpayer to leave the country is not a criterion. Nor it is limited to criminal cases, civil penalties are enough.
Before the IRS can revoke your passport, or prevent you from obtaining a new one, these seriously delinquent tax debt needs to be debt for which a:
- The government has issued a notice of federal tax lien and all administrative remedies under IRC § 6320 have lapsed or been exhausted
- The government has issued the levy
We’re all responsible for paying our fair share of taxes each year. But what happens when the amount that you owe is simply out of reach? What happens if you failed to make payments in a timely manner and your financial circumstances have shifted to the point where your cumulative debt is beyond your ability to pay? In the face of this untenable position, your best option for paying the IRS may be what is known as an Offer in Compromise.
The Goal of the Offer in Compromise
The Offer in Compromise, or OIC, was created to accomplish two goals: it allows American taxpayers who are unable to pay the full amount of their tax debt a way to negotiate a payment that is in keeping with their ability to pay, while at the same time providing the IRS with the ability to collect at least a portion of the amount that is owed to them. The process is neither simple nor fast: it generally takes at least one to two years for both sides to come to an agreement on an amount to be paid.
Many people suffer from Celiac’s disease. To be eligible to deduct the excess costs of a gluten-free diet under Internal Revenue Code Section 213, you must have a documented reason to require the observance of a gluten-free diet, along with a physician’s prescription to follow a gluten-free diet. This should provide sufficient documentation of eligibility.
The excess cost of gluten-free food can be deducted if you can deduct expenses paid for medical care for yourself, a spouse, or a dependent, to the extent the aggregate expenses exceed 10 percent of adjusted gross income.
If you meet both criteria above and choose to itemize deductions start collecting receipts and record them regularly. Download a spreadsheet from the Celiac Sprue Association for calculating the deductible expense.
Section 107 of the Internal Revenue Code provides that a minister of the gospel’s gross income doesn’t include the rental value of a home (parsonage) provided; if the home itself isn’t provided, a rental allowance paid as part of compensation for ministerial services is excludable. The benefit is generally referred to as a parsonage allowance. Thus, a minister can exclude the fair rental value (FRV) of the parsonage from income under IRC Sec. 107(1), or the rental allowance under Sec. 107(2), for income tax purposes. The Sec. 107(2) rental allowance is excludable only to the extent that it is for expenses such as rent, mortgage payments, utilities, repairs, etc., used in providing the minister’s main home, and only up to the amount of the FRV of the home.
However, either type of parsonage allowance is only excludable for income tax purposes and is subject to self-employment taxes, although for years before 2018 and after 2025, the amount subject to self-employment tax can be reduced by the minister of the gospel’s employee business expenses.
Back in October 6, 2017, in the US District Court for the Western District of Wisconsin, Judge Barbara B. Crabb, in Gaylor v. Mnuchin (the treasury secretary), concluded that Section 107(2) of the Internal Revenue Code is unconstitutional. Specifically, she concluded that this code section violates the Establishment Clause of the First Amendment because it does not have a secular purpose or effect and because a reasonable observer would view the statute as being an endorsement of religion.