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Your Tax Advocate
January 2019
Happy New Year. As usual I am including a simplified organizer which includes 27 yes/no questions, the privacy policy, my engagement letter and an Audit/ID Protection option. If you are self-employed, have rentals or itemized last year, I am also including additional customized pages. New for this year is a due diligence worksheet (see paragraph below). Please answer and sign the enclosed 27 yes/no questions and the due diligence worksheet (if required). Also sign the engagement and Audit/ID Protection letter before our appointment
So many changes are taking place on the 2018 tax return. It was estimated that the IRS would need 1.1 million labor hours to implement these changes. Guidance on the tax law changes have been trickling in. We are still waiting for guidance on some of the new tax laws. There will be 26 new forms and revisions to over 150 existing forms. With the higher standard deduction, many will not be itemizing for federal. California is not complying with most of the changes. Even if you don’t itemize for federal you may still be itemizing for state. I went over what to expect with most of you last year. The vast majority of you will benefit from the federal changes from a little to a lot. It is still anticipated that the 2018 withholding has generally gone down more than the tax savings. I hope you have checked your withholding during the year and compared it to what we projected.
Meals and Entertainment:
If you are self-employed, one deduction in the past was meals and entertainment. The new tax law initially eliminated this deduction. In September of 2018, IRS issued guidance. They are allowing meals but not entertainment.
199A Business Deduction/Rentals/1099s:
20% of the net profit from most businesses can be used to lower your taxable income. If a rental is a trade or business, then it will also qualify for the 199A deduction. However, we have yet to receive clarification on what exactly qualifies a rental for a trade or business. In order to cover our basis, I am encouraging anyone with a rental to issue 1099s this year. If you pay someone (other than a corporation) $600 or more for services in your business, you must issue them a 1099-MISC. This includes rents paid to landlords. Remember, they are due to the recipient and the IRS by January 31. It is a good practice to get the identification information of anyone before you pay them. It can be difficult to acquire this information after they have been paid. Use form W-9 to facilitate this request. The form W-9 is also what you would use for proof that you did not have to issue the 1099 because they were a corporation. I order extra 1099s that are available to be picked up.
Mortgage Interest:
The change in 2018 that will have the biggest effect in this category is that any amount of your mortgage that was not used to buy or improve your home is no longer deductible on your federal return. If you have ever refinanced and taken cash out of your home, we will have to do an allocation. We may be able to assign some of the interest on your cash back to other deductible areas of the tax return. How money was spent from any account 30 days before and 30 days after the refinance can count towards this calculation.
Taxes Paid:
The total of property tax, state taxes paid and DMV license fees will be limited to a maximum of $10,000 on your federal itemized deductions.
Miscellaneous Deductions:
Itemized deductions such as employee business expenses and investment expenses are not allowed anymore on your federal return. California will still allow them.
Child Tax Credit and Other Dependent Credit:
The Child Tax Credit has been increased to $2000 for your dependent child under 17. $1400 of this amount is potentially refundable. All other dependents will probably qualify for a new $500 credit. These credits are part of the reason for the due diligence worksheet.
Higher Income:
The income threshold for many credits and deductions have been substantially increased. It will be unusual to have tax benefits phased out due to income limitations.
Due Diligence Worksheet:
This year I am including a due diligence worksheet in your organizer. The IRS is stepping up enforcement and is trying to do more with less by requiring me to have a method in place to verify you qualify for certain credits. Please take a moment to answer the questions if you have any dependents, are claiming the head of household filing status or an education credit.
Audit/ID Restoration:
A majority of you signed up for the Audit/ID Restoration last year. In November of 2018, Marriott announced that 500 million guests at Marriott had their ID compromised. At this point, it is probably safe to assume your ID has been compromised from any countless data breaches. As I mentioned many times, the ID Restoration part of the coverage will be our new norm. Will the criminals do something this year with your information or in ten years….who knows. I will again be offering the coverage. This is still 100% optional.
Drop-Off/Mail-In Information:
I will continue to offer the drop-off or mail in option. I am often fully booked two to three weeks in the future. Many of you have started to take advantage of sending or dropping-off your information. I set aside time daily to work on these drop-offs and the return is completed much sooner than if you scheduled an appointment. I encourage most of you to utilize this service. Please make sure you include your yes/no questions, due diligence questionnaire, engagement letter, Audit/ID Protection letter and any customized organizer pages with your information. Please provide the best number to reach you as I will be calling to ask additional questions.
Health Insurance:
The penalty for not having health insurance has been repealed starting with the 2019 tax year. You were still required to have health insurance in 2018. The elimination of the penalty is currently the only change. Reduced health insurance rates continue to be available through the state or federal programs such as Covered California.
When you have all your information available, please call me for an appointment or drop it off. Please make sure I have all your accurate information before we complete your return. I look forward to seeing you again and I value your business.
Sincerely,
Elizabeth Bally, CPA
Enrolled Agent