Individual Tax Committee Articles

• IRS Automatically Waives Estimated Tax Penalty for Eligible 2018 Tax Filers +

  August 21, 2019
  
  By:  Deborah Kurtzke
          [email protected]
    
  
  Over the next few months, the IRS will mail copies of notices, CP 21, granting this relief to affected taxpayers. Any eligible taxpayer who already paid the penalty, will also receive a refund check, about three weeks after their CP21 notice, regardless if they requested penalty relief. The agency emphasized that eligible taxpayers who have already filed a 2018 return, do not need to request penalty relief, contact the IRS or take any other action to receive this relief.
  
  waiving the estimated tax penalty
  
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.
  

• "Back Door Roth Conversions" now explicitly legal +

  February 22, 2019
  
  By:  Kathy Howe-Hrach
  
  Thanks to a footnote in the Tax Cuts and Jobs Act of 2017, Congress has now officially “blessed” the back door Roth conversion.
  High income taxpayers with AGIs above the Roth contribution limits are not able to make direct contributions to a Roth.  Instead those taxpayers can contribute to a Roth IRA through a nondeductible IRA contribution followed immediately by a tax-free Roth conversion.   
  
  Under the Tax Increase Prevention and Reconciliation Act of 2005, taxpayers were permitted to make conversions of nondeductible IRA contributions into Roth IRAs starting in 2010.  However, because of the IRS step doctrine, there were concerns about the legality of the backdoor Roth IRA.  The step doctrine states that you cannot take multiple legal steps that when put together make an illegal action.  Some workarounds involved waiting a period of time between making the nondeductible IRA contribution and then doing the Roth conversion after a random period had passed.  
  
  The backdoor Roth IRA strategy employed by high-income individuals is now considered legal by Congress.
  
  One caveat:  aggregation rules under IRC Section 408(d)(2) apply so if the taxpayer owns multiple IRAs, the pre-tax IRAs are aggregated with the non-deductible IRA and the end result would be that only a portion of the non-deductible IRA contributions can actually be converted.
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.
  

   

• Waiving the Underpayment Penalty for 2018 for Some Taxpayers +

  February 22, 2019
  
  By:  Barbara A. Brown, CPA
  
  For those individuals who by January 15, 2019, paid in at least 85% of their 2018 federal income tax bill through payroll withholding, quarterly estimated income tax payments, or a combination of both, a slight change in the IRS rules for only this filing season may help avoid an underpayment penalty.  Eligible taxpayers must meet certain conditions described on the 85% Exception Worksheet of Form 2210 Instructions. Those who qualify will need to compete Form 2210 to request the waiver by checking Box A in Part II, writing "85% Waiver" next to that box, and filing page 1 of Form 2210 with either a paper or electronic return.
  
  Background:
  Section 6654(a) of the tax code imposes the penalty for failure to make a sufficient and timely payment of estimated income tax.  Under Section 6654 (d)(1)(B), the required annual payment is generally the lesser of:
  1. 90% of the tax shown on the return for the taxable year or
  2. 100% of the tax shown on the return for the preceding taxable year (110% applies here when adjusted gross income exceeds $150,000 for the calendar year.).
  
  Various concerns were raised about under-withholding in 2018 due to the massive tax law changes of the Tax Cuts and Jobs Act of 2017.  While the IRS took steps to re-educate the public about income tax withholding during 2018, this may not have been enough.  
    
  Section 6654(e)(3)(A) allows a waiver in certain cases:
  In general, no addition to tax shall be imposed under subsection (a) with respect to any underpayment to the extent the Secretary determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience.
  
  In response to concerns, the Treasury Department released Notice 2019-11 Relief from Addition to Tax for Underpayment of Estimated Income Tax by an Individual on January 16. 
  
  Going Forward:
  Taxpayers are still being urged to re-check their federal income tax withholding for 2019.  The following list from the IRS, although not all-inclusive, describes those especially prone to withholding under-/over-ages:  two-income families; people working more than one job or working only part-year; people with children who claim child-related credits; people with  dependents age 17 or older; people who previously itemized; people with higher incomes; and people with more complex returns.
  
  Resources include the IRS Withholding Calculator as well as in Publication 505, Tax Withholding and Estimated Tax, Form W-4 (2019) Employee’s Withholding Allowance Certificate  and Form 1040-ES (2019) Estimated Tax for Individuals.
  
   Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.
  
  

   

• Non-qualified Individual Annuities Are Taxable in Illinois. Here’s Why and More. +

  September 21, 2018
  
  Barbara Brown
  [email protected]
  
  
  There continues to be uncertainty concerning the tax treatment of earnings distributed from a non-qualified individual annuity.  This ambiguity extends to taxpayers, tax preparers, Illinois Department of Revenue (IDOR) representatives, and tax software companies.  The non-qualified individual annuity discussed here is a tax-deferred-earnings plan purchased with after-tax dollars by an individual directly from an insurance company.  It is not a deferred compensation or employer-based plan. 
    
  Section 203(a)(2)(F) of the Illinois Income Tax Act (IITA) defines the eligible subtraction of retirement income from AGI  on the Illinois Form 1040 as follows:
  
  An amount equal to all amounts included in such total pursuant to the provisions of Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408 of the Internal Revenue Code, or included in such total as distributions under the provisions of any retirement or disability plan for employees of any governmental agency or unit, or retirement payments to retired partners, which payments are excluded in computing net earnings from self employment (sic) by Section 1402 of the Internal Revenue Code and regulations adopted pursuant thereto.  
  
  Why Non-qualified Individual Annuities Are Taxable
  In a recent follow-up with IDOR’s management and legal staff, they clarified that the Internal Revenue Code provisions above refer to either qualified employer-based retirement plans or IRAs.  Income that does not fall under one of these provisions does not qualify for subtraction.  Non-qualified individual annuities are not eligible while annuities created within qualified plans (e.g. 403(b), IRA, etc.) are eligible for subtraction.  
  
  Why Non-qualified 457 Plans May Not Be Taxable
  Interestingly, distributions from 457 plans – sometimes described as non-qualified, tax-advantaged deferred compensation retirement plans -- may qualify for subtraction.  Such plans are discussed in more detail in an IDOR General Information Letter (GIL) dated September 17, 2009 which may be found at http://www.revenue.state.il.us/LegalInformation/LetterRulings/it/2009/IG090031.pdf:
  
  …the deduction allowed for distributions from government retirement plans does not depend on whether the plan is a qualified plan under federal income tax law. A government plan that qualifies as an eligible deferred compensation plan as defined in IRC Section 457(b) is eligible for deduction under IITA Section 203(a)(2)(F) because the plan constitutes a “retirement or disability plan for employees of any governmental agency or unit.” Similarly, a plan that is taxed under IRC Section 457(f) because the plan is not an eligible deferred compensation plan may still qualify for the deduction under IITA Section 203(a)(2)(F) provided that the deferred compensation arrangement is a retirement or disability plan for government employees.
  
  There are other examples of income eligible and not eligible for subtraction on IL-1040, Line 5, in Illinois Publication 120, Retirement Income.  
  
  Life Insurance, Endowment, or Annuity Benefits Received – Schedule M, Line 28
  Illinois Schedule M also allows for subtraction of annuity benefit amounts on IL-1040, Line 7 Other Subtractions; however, these are a very specific type of distribution received:  benefits accelerated due to terminal illness.  These payments are further explained in an IDOR GIL dated December 20, 2011 which may be found at http://www.revenue.state.il.us/LegalInformation/LetterRulings/it/2011/IT-11-0024.pdf 
  (At the time the GIL was issued, such payments were reported on Schedule M, Line 27.): 
  
  …The subtraction to be claimed on Schedule M, Line 27 …  is for amounts received as an acceleration of payment under an insurance policy before such amounts would otherwise be payable, as an indemnity for a terminal illness. See IITA Section 203(a)(2)(Q)…  
  
  When further clarification is needed on a tax topic, a request can be made by writing to IDOR’s Legal department:
  
  Illinois Department of Revenue
  ATTN: Legal Department
  101 W. Jefferson
  Springfield, IL 62702
  
   Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.
  

• Crypto Taxes for Like-Kind Exchanges +

  August 20, 2018
  
  Charlene Rhinehart
  [email protected]
  
  In 2017, many investors treated their crypto-to-crypto trades as like-kind exchanges under Section 1031. This treatment allowed investors to avoid tax liability. 
  
  The rules have changed for the 2018 tax year. 
  
  New tax legislation limits like-kind exchanges to only include real estate. Bitcoin and other cryptocurrencies are considered “convertible” virtual currency under IRS Notice 2014-21 and are not eligible for the like-kind exchange treatment (Form 8824). 
  
  So, if you are a crypto investor who trades Bitcoin for Ethereum, it will be a taxable transaction in 2018. 
  
  

   Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• Tax Cuts and Jobs Act of 2017 - An Overview of Individual Tax Provisions +

  August 20, 2018
  
  Matthew J. Zaba
  FGMK, LLC
  [email protected]
  
  
  The Tax Cuts and Jobs Act (TCJA) of 2017 constitutes the most significant revision of the Internal Revenue Code since the Tax Reform Act of 1986. The bill contains many provisions affecting both individuals and businesses. This article focuses on the more important elements of the new law that have an impact on individuals. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025. 
  
  Tax Rates – The following tax brackets and rates will expire and revert to the previous rates beginning in 2026. The new tax brackets are as follows:
  
  Married Filing Joint (based on taxable income)
  • 10% from $0 to $19,050
  • 12% from $19,050 to $77,400
  • 22% from $77,400 to $165,000
  • 24% from $165,000 to $315,000
  • 32% from $315,000 to $400,000
  • 35% from $400,000 to $600,000
  • 37% from $600,000 and above
  
  Single (based on taxable income)
  • 10% from $0 to $9,525
  • 12% from $9,525 to $38,700
  • 22% from $38,700 to $82,500
  • 24% from $82,500 to $157,500
  • 32% from $157,500 to $200,000
  • 35% from $200,000 to $500,000
  • 37% from $500,000 and above
  
  Capital Gain/Qualified Dividend Rates – Set as Statutory Dollar Amounts – The TCJA generally retains the present law 0%, 15%, and 20% tax rates on net long-term capital gains and qualified dividends. However, these rates are no longer tied to ordinary income tax brackets. For tax years after 12/31/17, the breakpoints at which the preferential tax rates begin to apply are set by a statutory dollar amount and is indexed for inflation. For 2018, the 15% breakpoint is $77,200 for MJF and $38,600 for single taxpayers. In addition, the 20% breakpoint is $479,000 for MJF and $425,800 for single taxpayers.    
  
  Increased Standard Deduction - this provision will expire and revert to the previous system in 2026. The standard deduction for individuals is increased as follows:
  • Single/Married Filing Separately - $12,000
  • Head of Household - $18,000
  • Married Filing Joint - $24,000
  
  Personal & Dependency Exemptions – this provision is suspended for tax years beginning after 12/31/17. 
  
  Affordable Care Act (ACA) Individual Mandate – For tax years after 12/31/18, the individual mandate penalty (shared responsibility payment) under the ACA is repealed.
  
  Roth Conversion Re-characterizations - Under the TCJA, the re-conversion of a Roth IRA back into a traditional IRA is no longer permitted. The IRS has clarified that re-conversions back into a traditional IRA will be permitted through October 15, 2018. A Roth IRA conversion made on or after January 1, 2018 cannot be re-characterized.
  
  Section 529 Plans – The TCJA allows distributions from Section 529 plans of up to $10,000 per year for an account beneficiary’s tuition at a public, private, or religious elementary or secondary school.
  
  Kiddie Tax Changes – Earned income is taxed based on rates for single taxpayers and unearned income above the annual threshold will be taxed at the same rates as applied to trusts and estates. As a result, the child’s tax is unaffected by the parent’s tax situation or the unearned income of siblings.
   
  Alternative Minimum Tax (AMT) – The AMT has been retained for individuals by the new law, but the exemptions have been increased. For tax years after 12/31/17, the TCJA increases the exemption amounts to $109,400 (MFJ) and $70,300 (single). The exemption is phased out for taxpayers with alternative minimum taxable income (AMTI) over $1M for joint filers and over $500,000 for all others. 
  
  Alimony Payments - For any divorce or separation agreement executed after 12/31/18, alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.
  
  Moving Expenses – For tax years after 12/31/17, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.
  
  Student Loan Discharge - For discharges of indebtedness after 12/31/17, certain student loans that are discharged on account of death or total and permanent disability of the student are excluded from gross income.
  
  Itemized Deductions – Medical Expenses - For tax years after 12/31/16 and before 1/1/19, the threshold on medical expense deductions is reduced to 7.5% of adjusted gross income (AGI) for all taxpayers.
  
  Itemized Deductions – State and Local Taxes (SALT) – For tax years after 12/31/17, the TCJA limits the deduction to $10,000 for the aggregate of state and local income taxes, property taxes or sales taxes (if elected).
   
  Itemized Deductions – Mortgage Interest – For tax years after 12/31/17, the deduction for home mortgage interest is limited to interest on up to $750,000 (previously $1M) of acquisition indebtedness and the deduction for interest on home equity indebtedness is suspended (previously $100k). The new lower limit doesn't apply to acquisition indebtedness incurred before Dec. 15, 2017.
  
  Itemized Deductions – Personal Casualty Losses – For tax years after 12/31/17, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a federally-declared disaster.
  
  Itemized Deductions – Charitable Contributions – For contributions made after 12/31/17, the 50% limitation for an individual's cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years.
  
  Miscellaneous Itemized Deductions – For tax years after 12/31/17, the deduction for miscellaneous itemized deductions that are subject to the 2%-of-AGI floor is suspended. This generally includes: tax preparation fees, investment expenses, unions dues and unreimbursed employee business expenses.
  
  Itemized Deduction Limitation – For tax years after 12/31/17, the “Pease limitation” on overall itemized deductions for high-income earners (also referred to as the “3%/80% rule) is suspended.
  
  New Deduction for Qualified Business Income - For tax years after 12/31/17, the TCJA adds a new deduction for noncorporate taxpayers for qualified business income (QBI) and is referred to as the “pass-through deduction.” The deduction reduces taxable income, rather than adjusted gross income (AGI), but is available to taxpayers who take the standard deduction. The deduction is generally 20% of a taxpayer's qualified business income (QBI) from a partnership, S corporation, or sole proprietorship.
  
  Child Tax Credit - For tax years after 12/31/17, the child tax credit is increased to $2,000. The income levels at which the credit phases out are increased to $400,000 (MFJ) or $200,000 (single). The amount of the credit that is refundable is increased to $1,400 per qualifying child and is indexed for inflation. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500. In addition, a $500 nonrefundable credit is provided for certain non-child dependents.
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• Opportunity to Defer Capital Gains +

  July 26, 2018
  
  David Kipp
  [email protected]
  
  
  Would you like to defer tax on capital gains by re-investing the gains within 180 days? Invest in a qualified opportunity fund and you can do just that without a limit or cap on the amount invested. 
  
  These funds are not just limited to real estate, but have the freedom to invest in anything as long as it falls in a qualified opportunity zone. The opportunity zone is a distressed community nominated by the state and approved by the IRS. So far about 8,700 areas have been nominated and approved. 
  
  The opportunity zones were added to the tax code by the Tax Cut and Jobs Act of December 2017. The possible outcome of an investment in one of these funds are:
  Deferral of capital gains if you sell your stake in the opportunity fund within 5 years. After a holding period of 5 years you will get a step-up in basis of 10% of your initial investment, and if you hold for another 2 years (7 years total) you get an additional 5% step-up in basis. 
  
  Where it gets a little complicated is on December 31, 2026, you must pay the tax on your deferred gain even on funds that you remain invested in, but you get to include any step-up in basis you received if held over 5 years by the 2026 date. Ideally you would want to make an investment by December 31, 2019 in order to get the most tax benefit when the gain must be paid. 
  
  An additional incentive is if investment is held for 10 years or longer in an opportunity fund on the date of sale the basis becomes the sale price.  You would pay no tax on the gain you received over the life of your investment. 
  
  The goal is to spur investment in distressed areas but can also provide a great tax benefit for those who take advantage of this addition to the tax code. 
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.
  

• Revocation or Denial of Passport in the Case of Certain Unpaid Taxes +

  July 26, 2018
  
  Nancy Pastroff
  [email protected]
  
  
  If an individual has a seriously delinquent tax debt, IRC Section 7345 authorizes the IRS to contact the State department. Upon receiving certification from the IRS, the State department can deny a passport application or even revoke one’s current passport.  If this happens when the individual is already overseas, the State department may issue a limited validity passport good only for direct return to the United States.
  
  A seriously delinquent tax debt is one in which an individual’s unpaid, legally enforceable federal tax debt totals more than $51,000 (including interest and penalties) for which a notice of federal tax lien has been filed and all administrative remedies have lapsed or been exhausted; or an IRS levy has been issued.  A seriously delinquent tax debt does not include certain debts that the IRS may collect like FBAR penalties or child support.  It also does not meet the definition if it is included in the list below:
  
  1. A debt being paid timely with an IRS approved installment agreement
  2. A debt being paid timely with an IRS approved offer in compromise
  3. A debt for which a collection due process hearing is timely requested regarding a levy
  4. A debt for which collection has been suspended because of a request for innocent spouse relief.
  5. A taxpayer in bankruptcy
  6. A taxpayer which is identified by the IRS as a victim of tax-related identity theft
  7. A taxpayer whose account the IRS has determined is currently not collectible due to hardship
  8. A taxpayer who is located in a federally declared disaster area
  9. A taxpayer who has a request pending with the IRS for an installment agreement
  10. A taxpayer who has a pending offer in compromise with the IRS
  11. A taxpayer who has an IRS accepted adjustment that will satisfy the debt in full
  
  Before denying a passport, the State department will hold the passport application for 90 days to allow the individual to resolve erroneous certification issues, to make full payment of the tax liability or to enter a satisfactory payment arrangement with the IRS.  Also, certification will be postponed if the individual is serving in a designated combat zone or participating in a contingency operation.
  
  The IRS is required to notify the taxpayer in writing (at the last known address) at the time the IRS certifies the seriously delinquent debt to the State department.  The IRS is also required to notify the taxpayer in writing when it reverses the certification.  The IRS will reverse the certification when the tax debt is fully paid or becomes legally not enforceable, the tax debt no longer meets the definition of being seriously delinquent or it is determined that the certification was erroneous.  The IRS will make the reversal within 30 days and provide notification to the State department as soon as possible.
  
  The IRS started to notify the State department of seriously delinquent tax debts in February of 2018 so this is a fairly new procedure.  While this likely does not affect a good percentage of U.S. Citizens, it is not well-known and your clients should be aware of this in order to avoid the problem to begin with.  Please check www.irs.gov for additional information and alerts.
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.
  

   

• Extenders Added to Budget Bill +

  February 21, 2018
  
  Deborah L. Kurtzke
  Grieco Kurtzke & Adelman LLC
  [email protected]
  
  The bipartisan budget deal signed into law Friday by President Trump contains 36 tax extenders that had expired at the end of 2016 and makes them retroactive to 2017.
  
  The deal also extends for 2017
  
  1. The above-the-line deduction for qualified tuition and related expenses
  2. The treatment of mortgage insurance premiums as qualified residence interest
  3. The extension of the exclusion from gross income of discharge of qualified principal residence indebtedness.
  
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• Good News for Illinois LLCs +

  February 7, 2018
  
  Barbara Brown
  [email protected]
  
  A new law took effect December 20, 2017, dramatically reducing filing and operating fees for LLCs in Illinois. Up to this point, such fees had been considered among the highest in the nation. The law change was a direct result of HB325 sponsored by Democratic State Representative Carol Sente in January, 2015, and SB867 sponsored by Democratic Senator Thomas Cullerton in February 2017.  
  
  As examples, Articles of Organization and Annual Report fees have been cut by 70% to $150 and $75 respectively.  More complete information including a list of fee changes can be found in a recent news release by Jesse White and Public Act 100-0571.  
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• Heads of Household, New Penalty! The Winds of Change are Blowing +

  January 12, 2018
  
  Larry J. Wolfe, CPA
  [email protected]
  
  According to the Tax Cuts and Job Act that was passed on December 22, 2017,  effective for tax years beginning after December 31, 2017, the new Act expands the due diligence requirements for paid preparers. This requirement is to cover how eligibility is determined, for a taxpayer to file as head of household. A penalty of $500 (adjusted for inflation) is imposed for each failure to meet these requirements. (Code Sec. 6695(g), as amended by Act Sec. 11001(b).
  
  For the upcoming tax season, I am having my office, for clients who file as head of household, obtain the documentation that I think will meet the due diligence criteria. This documentation will probably include a notation in the clients file that we informed the client of the requirements for filing as head of household. I may have a separate statement from the client stating that the client understands the requirements of head of household and meets the requirements of head of household.  In addition, it will be important to obtain at least one third party document that supports the head of household requirements. This could be any document that indicates the existence of a qualifying individual that is a part of the household, such as a letter from a doctor or school.
  
  As a reminder for the upcoming 2017 season, I suggest that all tax preparers read the bottom of Form 8867, Part IV, in which the tax preparer certifies that he or she has complied with all of the due diligence requirements with respect to the following credits claimed on the return: earned income credit, American Opportunity Tax Credit, Child Tax Credit, and the Additional Child Tax Credit. The due diligence requirements include the following:
  
  A. Interview the taxpayer, ask adequate questions, document the taxpayer’s response on your copy of the return or in your notes and notices, review adequate information to determine if the taxpayer is eligible to claim the credit(s) and in what amount(s).
  
  B. Complete the Form 8867 truthfully and accurately and complete the actions described in this checklist for all credits claimed.
  
  C. Submit Form 8867 in the manner required;
  
  D. Keep all five of the following records for 3 years from the latest of the dates specified in the Form 8867 instructions under Document Retention:
  
  • A copy of Form 8867.
  • The applicable worksheet(s) for any credits claimed (with your notes).
  • Copies of any taxpayer documents you may have relied upon to determine eligibility for and the amount of the credit(s).
  • A record of how, when, and from whom, the Information used to prepare this form and worksheet(s) was obtained.
  • A record of any additional questions you may have asked, to determine eligibility for and the amount of the credits, and the taxpayer’s answers.
  
  At the bottom of Form 8867 the practitioner is signing off on and attesting to: “Do you certify that all of the answers on this Form 8867 are, to the best of your knowledge, true, correct, and complete?”
  
  There is a reminder at the bottom of Form 8867 that “if you have not complied with all due diligence requirements for all credits claimed, you may have to pay a $510 penalty for each credit for which you have failed to comply”.
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.
  

   

• Individual Year-end Tax Planning for Vanishing Deductions +

  December 11, 2017
  
  Dmitriy Polyakov
  [email protected]
  
  Individual Year-end Tax Planning for Vanishing Deductions
  
  Uncertainty as to future tax rates and allowable itemized deductions makes the year-end tax planning process more difficult than ever.  
  
  Actions to defer income will likely save taxes if your tax rate is projected to decrease.  With many deductions on the chopping block, accelerating deductions may represent a “use it or lose it” opportunity.
  
  State and local income taxes appear likely to be eliminated or substantially decreased under the proposed tax legislation.  Therefore, payment of taxes before year end can reap benefits…. as long as the taxpayer is not subject to Alternative Minimum Tax (referred to as the dreaded AMT).
  
  For state income taxes, this can be accomplished by paying any additional projected taxes for 2017 through withholding or an estimated tax payment made before year end.  For real estate taxes, you need to check with your local county as to their procedures for pre-paying taxes normally due in 2018.  
  
  For example, Cook county allows pre-payment of the first installment due for 2018 (which is 55% of the prior year tax).  But, to do this, you must contact the county and have them send you a prepayment bill and the tax payment must be received prior to year end.  Lake County allows a prepayment based on the full amount of your prior year tax bill, but, the taxpayer must submit a signed a prepayment agreement along with the payment.  McHenry, Will and DuPage Counties have similar requirements.  
  
  Additional deductions which are likely to be reduced or eliminated include medical expenses, home equity loan interest and caps on mortgage interest.  Those taxpayers impacted by these changes should take action to maximize deductions for these items in 2017.
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.
  
  

   

• Cook County Sweetened Beverage Tax +

  May 17, 2017
  Deborah L. Kurtzke
  [email protected]
  
  

  Cook County Sweetened Beverage Tax is not a retail tax and should be paid by a registered distributor, however store stock as of 6/30/2017 each retailer will have to self-assess the tax.

  Cook County Sweetened Beverage Tax Floor Stock Return Due 

  On or before August 20, 2017, every Retailer of sweetened beverage will be required to submit a Floor Tax Return and remit the applicable tax amount. The Floor Tax return must reflect the Retailer’s inventory, on which tax was not previously paid, that was in his/her possession on June 30, 2017.

  • Need the number of ounces of syrup and or powder used to produce sweetened beverages.
  • Need number of ounces of bottled and or canned sweetened beverages on hand.

  SWEETENED BEVERAGES ARE DEFINED AS:  any non-alcoholic beverage, carbonated or non-carbonated, which is intended for human consumption and contains any caloric sweetener or non-caloric sweetener, and is available for sale in a bottle or produced for sale through the use of syrup and/or powder. Sweetened beverage does not include (1) beverages consisting of 100% natural fruit or vegetable juice; (2) beverages in which milk, or soy, rice, or similar milk substitute, makes up more than 50% of the beverage or is the first listed ingredient on the label of the beverage; (3) beverages to which a purchaser can add, or can request that a retailer add, caloric sweetener or non-caloric sweetener; (4) infant formula; (5) beverages for medical use; (6) any liquid sold as a therapeutic nutritional meal replacement or for use for weight reduction as a meal replacement; or (7) any syrup or powder that the purchaser himself or herself combines with other ingredients to create a beverage.

  Sample form available with the hyperlink below. – Actual form not yet available

  https://www.cookcountyil.gov/service/sweetened-beverage-tax
  
  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

   

  
  

• New Rules Allowing Disaster Loss Election From Prior Year +

  Byline:  Hurricane and flooding prompt the relief measure.  
  February 13, 2017
  George Lehman
  [email protected]
   
  Taxpayers that want to elect to deduct a disaster loss in the tax year preceding the year in which the disaster actually occurred will have more time to make that election under temporary regulations.  The IRS issued the regulations after Hurricane Matthew and related flooding caused federally declared disasters last autumn in the southeastern United States. They govern the time to make an election under Sec. 165(i) to accelerate a loss attributable to a federally declared disaster and the time allowed to revoke those elections. Sec. 165(i) allows taxpayers to deduct a "loss occurring in a disaster area and attributable to a federally declared disaster" in the tax year immediately preceding the tax year the disaster occurred.
  
  The temporary regulations also provide definitions of "federally declared disaster," "federally declared disaster area," "disaster loss," "disaster year," and "preceding year" for these purposes.
  
  Under the prior rules (Regs. Sec. 1.165-11(e)), a taxpayer had to make the election to take a loss in an earlier tax year by the unextended due date for the taxpayer's return, generally April 15. This short period to make the decision whether to elect relief put undue pressure on taxpayers and required the IRS to issue a number of extensions of time to make the election after large natural disasters such as Hurricane Katrina in 2005 and Hurricane Sandy in 2012.
  
  Under the new rules, the deadline for the election to claim the loss on the prior year's tax return is six months after the due date for filing the taxpayer's federal income tax return for the disaster year (determined without regard to any extension of time to file). The temporary regulations also extend the period for revoking the election to 90 days after the due date for making the election.
  
  The procedures for making or revoking the election are described in Rev. Proc. 2016-53, which was also issued in October and contains additional rules to ensure consistent return positions by taxpayers so they take a loss in only one tax year.
  • T.D. 9789

  Source:  “New rules allow more time to elect to take disaster loss in prior year” Journal of Accountancy January 1, 2017

   Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• Individual Tax Incentives Expired at End of 2016 +

  January 26, 2017
  George Lehman
  [email protected]

  Key Highlight: Despite PATH ACT, some individual tax incentives expired at the end of 2016

  With the passage of the Protecting Americans From Tax Hikes (PATH) Act in December 2015, Congress took care of a large part of the problem of expiring tax provisions.  A great number of tax items that were set to expire and had been traditionally renewed at the last minute (or retroactively) were extended either permanently or, in some cases, for five years.

  However, a small but important number of tax provisions expired at the end of 2016, including tax incentives for individuals.

  Congress did not enact extender legislation that would prevent the expiration of these provisions during its recently ended lame-duck session.  The extenders were not part of the Further Continuing and Security Assistance Appropriations Act, 2017, P.L. 114-254, which funds the federal government through April 28, 2017.

  It is possible Congress may retroactively extend some or all of these provisions as it reconvenes, but as it currently stands, the following provisions for individuals expired at the end of 2016:

  • Sec. 108(a)(1)(E), which excludes from gross income discharge of qualified principal residence indebtedness income.
  • Sec. 163(h)(3), the treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer's principal residence.
  • Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses.

  Also expiring at the end of 2016 is the 7.5% adjusted-gross-income floor for deducting medical expenses, applicable to individuals age 65 and older and their spouses, which will rise to 10% in 2017 (Sec. 213(f)).

  Source:  “Despite PATH Act, some tax provisions expire at end of 2016” Journal of Accountancy December 16, 2016

   Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• Practical Implications or Recently Enacted Legislation +

  January 26, 2017
  George Lehman
  [email protected]

  Byline:  New due-diligence requirements and individual and business provisions promise a workout for completing 2016 returns.

  The Journal of Accountancy recently published a detailed article:  “Getting in shape for tax season,” by Paul Bonner, January 1, 2017, for tax practitioners regarding the practical implications of recently enacted legislation and the new procedural and technical requirements they impose, including new due-diligence provisions, with potential preparer penalties. 

   Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• Deducting Executive MBA Expenses +

  November 11, 2016
  David Kalet
  David Kalet CPA LLC
  [email protected]
  
  
  IRC 162 allows a deduction for ordinary and necessary expenses paid in carrying on a trade or business.  The IRS has held that education expenses are deductible if the education maintains or improves the skills related to a taxpayer’s trade or business.  However, the education costs are not deductible if the education is required to get into the field (as opposed to staying in the field) or qualifies taxpayer for a new trade or business.  For example, if a MBA graduate switches fields after graduation, it is difficult to justify the deduction. These deductions are clearly not available for business students that continue their education with a Master’s in Business Administration following their Bachelor’s Degree without working in between.  
  
  Executive MBA students are more likely to qualify for the educational expense deduction if they begin the program after working for an employer.  Executive MBA programs often target students that need to improve their business skills because they may not have received business training at their undergraduate school. Executive MBA programs tend to favor candidates that have work experience as an admission consideration.  In Kopaigora vs Commissioner (TC Summary Opinion 2016-35) the Tax Court clarified when education expense deductions by an Executive MBA student met those requirements.  
  
  For taxpayers meeting the education expense requirements the rules allow deductions for educational costs as “unreimbursed business expenses” on Schedule A (for employees) and Schedule C (for self-employed).  In the case of an employee, educational expenses that are deductible may be claimed as an itemized deduction, but only to the extent the expenses, along with other itemized deductions, exceed 2% of the taxpayers adjusted gross income (AGI).
  
  Some of the deductions include, but are not limited to:
  • Tuition
  • Books and supplies
  • Travel
  • Overnight lodging
  • Meals when travel requires overnight lodging
  Taxpayers may want to first consider to utilize the American Opportunity tax credit/Lifetime Learning credit or the Qualified tuition deduction before utilizing the “unreimbursed business expenses” deductions.
  
  Disclaimer: This is preliminary guidance only.  Compliance depends on developing and maintaining adequate recordkeeping, proper classification and allocation and reporting of expenditures.
  

   

• New Due Dates for Employer Healthcare Reporting +

  February 10, 2016
  Barbara A. Brown, CPA
  [email protected]

  Notice 2016-04 automatically extends on a one-time basis the information reporting due date requirements under I.R.C. §§ 6055 and 6056 for Forms 1094 and 1095.  The notice applies to “insurers, self-insuring employers, and certain other providers of minimum essential coverage under section 6055 of the Internal Revenue Code (Code), and the information reporting requirements for applicable large employers under section 6056 of the Code.”

  In addition, for 2015 only, individual taxpayers may prepare their tax returns using other information received from their health insurance providers and “need not amend their returns once they receive the Form 1095-B or Form 1095-C or any corrections.  Individuals need not send this information to the Service when filing their returns but should keep it with their tax records.”

  Form 1095-B Health Coverage uses Transmittal Form 1094-B when filed with the IRS.

  Form 1095-C Employer-Provided Health Insurance Offer and Coverage uses IRS Transmittal Form 1094-C.

  Forms 1095-B and 1095-C must be sent to plan participants no later than March 31, 2016.

  Copies of the above forms as well as their respective Form 1094 Transmittals must be filed with the IRS no later than May 31, 2016, if filed manually, or June 30, 2016, if filed electronically.

  These extended due dates do not apply to future filings.

  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• Recent Letters from the IRS +

  February 10, 2016
  Barbara A. Brown, CPA
  [email protected]

  Recently, the IRS has been mailing letters to both taxpayers¹ and tax return preparers².

  Taxpayers who claimed the Earned Income Tax Credit (EITC) but whose filed returns do not match IRS records are receiving the following letters as they apply:

  Letter 5621 requests the taxpayer to review that each child claimed has met eligibility criteria for the EITC.

  Letter 5621-A asks the taxpayer to review the accuracy and appropriateness of all Schedule C (or C-EZ) income and expense.

  When an error is found, the taxpayer should amend his return accordingly. Additional information concerning the handling of these letters may be found here.

  Tax professionals are receiving letters from the IRS Return Preparer Office.  The following letters began mailing to preparers at the end of 2015:

  Letter 5271 and Letter 5272 address the Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC).  Letter 5272 specifically references children with ITINs.  These letters remind paid preparers of their professional responsibilities for accurately claiming these credits as well as completing Schedule 8812 Additional Child Tax Credit as required.

  Schedule 8812 Part I must be completed for any qualifying child with an ITIN who is being claimed for the CTC; however, Schedule 8812 does not need to be completed if all children are identi­fied by a Social Security Number (SSN) or an Adoption Tax Identification Number (ATIN) and the ACTC is not being claimed.

  For a taxpayer to be eligible for the CTC, ACTC, or EITC where the EITC is based on having children, a dependent must meet the definition of a qualifying child. The dependent must meet certain relationship criteria in order to qualify for the credit (e.g., client's son, daughter, stepson, stepdaughter, adopted child, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister or a descendent of any of them).  A child dependent who is a qualifying relative is not sufficient.

  Beginning in 2015, if Form 2555 or Form 2555-EZ is filed to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the ACTC may not be claimed.

  Also, beginning in 2015, all individuals reported on the return must have either an SSN or an ITIN by the due date of the 2015 return including extensions in order to claim the CTC or the ACTC.  The IRS will not accept amendments to add these identification numbers to the return later.  See Publication 972 for additional information.

  Although it has not been reviewed or updated since January 2015, a Child Related Tax Benefits Comparison chart may be helpful and can be found at EITC Central.  Here, required criteria are compared for the EITC, the dependency exemption, CTC, Head of Household, and Child and Dependent Care Credit.

  Letter 5573 is being sent to credentialed3 preparers as a reminder of the importance in accurately reporting Form 1099-K and Schedule C for clients. Letter 5574 (a variation) was mailed earlier in the year to unregulated preparers.

  Beginning in 2015, completion of Form 1099-K Box 1b (Card Not Present transactions) is mandatory. In prior years, completing this box was optional.

  Other information concerning IRS letters and visits to return preparers can be found at here.

  1. Jeff Stimpson, “IRS Sends Letters Regarding 2014 EITC Claims,” Accounting TodayDecember 30, 2015
  2. Jeff Stimpson, “RPO Advisory Letters to Mail Soon,” Accounting Today December 24, 2015
  3. Credentialed here means those preparers who hold professional designations or who have otherwise voluntarily completed the Annual Filing Season Program (AFSP) for continuing education.

  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• New IRS Form 2848 +

  January 27, 2016
  Barbara A. Brown, CPA
  [email protected]

  A new Power of Attorney Form 2848 and related instructions are now available on IRS.gov.

  Part II no longer shows a “Registered Tax Return Preparer” (designation i).

  The description of “Unenrolled Return Preparer”(designation h) is updated to explain requirements for client representation.  This includes the preparer’s completion of the Annual Filing Season Program (AFSP).  After December 31, 2015, unenrolled return preparers may not submit Form 2848 unless they have met the AFSP requirement.

  Unenrolled return preparers may, however, still submit Form 8821 authorizing them to receive or view confidential tax information on behalf of the client.  They may also still be named as a “Third Party Designee” on the client’s Form 1040. This allows the IRS to contact them about any issues while the return is being processed and automatically expires April 15 of the next year.

  See Form 2848’s instructions for additional information.

  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

• Non-Cash Charitable Contributions Substantiation Requirements +

  January 25, 2016
  Kathleen Howe-Hrach, CPA/ CFP®
  BMO Private Bank
  [email protected]

  The typical doorknob receipts to not satisfy the strict documentation requirements for noncash charitable contribution deductions. The Tax Court in an opinion released in April, 2015 (Kunkel, T.C. Memo 2015-71), clarified that the “doorknob” hangers left by truck drivers who pick up charitable contributions of clothing and miscellaneous household items, etc., do not satisfy the regulatory substantiation requirements in IRS Code Section 170.

  The key facts in the Kunkel case were:

  • Taxpayers did not have a contemporaneous written acknowledgement from the charity to which they donated non-cash items;
  • The doorknob hangers were not dated and did not include the taxpayers’ names;
  • The doorknob hangers did not describe the property being donated;
  • Taxpayers contended they did not need written acknowledgements because they made their contributions in batches of less than $250;
  • Taxpayers did not maintain written records as to when or how the donated items were acquired or what the cost basis of the items were;
  • Taxpayers did not maintain written records as to how they calculated the fair market value of the items donated;
  • The taxpayers also failed to provide credible evidence the items were in “good used condition or better.”

  The due diligence requirements of Circular 230 hold return preparers responsible for amounts claimed on clients’ tax returns. Communicating to clients the requirements of and documenting noncash items donated are essential in satisfying the substantiation requirements.

  Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.