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Guideline For Retaining Tax Documents

Now that the 2018 tax deadlines have passed, it is a good time to think about what to do with the tax documents associated with 2017 tax returns. In general, it is recommended that receipts and statements that could be used to substantiate items reported on a tax return be kept until the statute of limitations for that return expires. However, the length of this statue may vary according to the particular circumstances associated with the return. In addition, documents pertaining to such things as property and securities should be kept beyond the statute of limitations. Since the IRS and the United States Tax Court operate under the assumption that a taxpayer is guilty of tax fraud if they are unable to provide proof of the items claimed on a tax return, it is crucial to know and understand the guidelines associated with retaining tax documents.

In general, the IRS will only audit a tax return within three years from the deadline for submitting the return or from the date the return is actually submitted, whichever comes later. However, this limitation period may be extended to six years if the return incudes foreign asset income that exceeds $5000 or a deduction for a bad debt or a worthless security. It may also be extended to the six year mark in the case where gross income is underreported by more than 25%. The audit limit for an intentionally fraudulent tax return is indefinite. Based on these time constraints, tax documents should be kept for a minimum of three years to seven years from the time a tax return is submitted, depending on the nature of the return.

The following are some more specific guidelines pertaining to the length of time various documents should be retained for tax purposes:  

·        Tax Returns and Supporting Documentation

Tax returns and all associated tax information should be kept for a minimum of seven years in order to exceed the statute of limitations period for an IRS audit. Supporting documentation includes W-2s and 1099s as well as checks and payment records that are necessary to support any credits or deductions claimed on the returns.

·        Bank and Credit Card Statements

Since bank and credit card statements are not considered to be sufficient documentation for items reported to the IRS, they do not need to be held for any specified time period.  

·        Employment Tax Records

Employment tax records should be kept for a minimum of four years from the date the tax is due or the date it is paid, whichever comes later.

·        Records Related to Property Transactions

Property tax records should be retained until the expiration of the IRS statute of limitations for the tax year in which a property is sold or disposed of by some other means. Such records are needed to calculate depletion, amortization and depreciation for tax purposes and to determine the net capital gain or loss that has resulted from owning the property. It should be noted that, in the case of a nontaxable property exchange, it is necessary to hold the records of the old property as well as the one acquired in the exchange.

·        Brokerage Statements

Brokerage statements should be kept indefinitely due to the fact that the cost basis of a security must be reported at the time of sale. This requires brokerage statements documenting the security’s complete transaction history.

·        IRA Records

IRA transaction records, including those for Roth IRAs, should be kept until all funds are withdrawn from the account and the account is closed.

·        Business Contracts

All business contracts, including partnership agreements, property records and commission and royalty structures, among other things, should be kept indefinitely.

It should be noted that documents that are no longer needed to substantiate items reported on tax returns may be needed for other purposes. Various entities such as lenders, other creditors and insurance companies have their own time and documentation requirements that may differ from those of the IRS.                 

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702) 514-4048 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today

2018 Tax Planning Tips

With a new tax law in effect as of January 1st, effective tax planning for the coming year will require a whole new approach. The Republican tax reform proposal that was voted into law at the end of 2017 includes some sweeping changes that affect both individuals and businesses. This being the case, taxpayers can only hope to maximize their tax advantage in the coming year by becoming familiar with the provisions of Trump’s tax bill and adjusting tax strategies accordingly. While it is always wise to look at what impact financial events of a previous year have had on taxes owed, this year that impact will have to be analyzed with an eye on the potential effects of the new tax law.

The following are helpful tax planning tips for the coming year:

1)      Be aware of the new tax brackets.

The new tax reform plan still has seven tax brackets (the same as the old plan), with the tax rates for each bracket mostly lower. However, the income limits of the tax brackets have changed significantly. These changes represent an important tax planning consideration, especially as they relate to realizing capital gains and capital losses and accelerating or deferring income.

2)     Become familiar with changes to 529 plans.

The limit for contributing to 529 plans without a gift tax assessment has been increased from $14,000 to $15,000. In addition, the new tax law allows taxpayers to use 529 funds to cover elementary and high school tuition with a limit of $10,000 per year per beneficiary. This new provision provides a significant tax saving opportunity for those individuals who are living in states where portions of 529 plan contributions are exempt from the state income tax.

3)     Make use of the more lenient medical expense deduction.

The new tax law allows taxpayers to deduct medical expenses that are in excess of 7.5 % of their adjusted gross income. This amount represents an increase in the medical expense deduction from 2017 which only allowed a tax deduction for unreimbursed medical expenses that were in excess of 10% of adjusted gross income.

4)     Weigh other changes to the tax code that may affect taxes owed.

In addition to the items outlined above, there are numerous other changes to the tax code that will impact taxpayers in different ways. For example, the tax deductions for job-related moving expenses and home equity loan interest have been eliminated and the threshold for writing off mortgage interest has been reduced. Because changes such as these will affect tax related decisions as they present themselves, it is important for taxpayers to be familiar with the provisions of the new tax bill as the year gets underway.

In addition to being aware of the tax changes initiated by Trump’s tax plan, it is important, as always, to keep good records and track tax-related expenses all year long rather than scrambling to get things together at tax time. This kind of careful record- keeping, combined with making use of the tax advantages that are built into the tax code, have the potential to provide a significant savings of tax dollars. With income tax representing one of the major expenses for many households, these tax-related tasks take on a very important role.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)514-4048 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

New Tax Law Brings Major Change

The provisions of the new tax law, many of which went into effect as of January 1st, are broad and extensive. This being the case, both business and individual taxpayers would be well advised to understand the ramifications of these sweeping changes before making important tax planning decisions. Although most of the changes go into effect at the beginning of 2018, some have future initiation dates. In addition to starting at different times, some of the provisions also have phase out periods which adds another twist to the tax planning mix. The following list highlights some of major changes targeted by the new tax law organized according to activation date.

Individuals

Retroactive

·        Increase in Medical Expense Deduction

Retroactive to include the 2017 tax year, taxpayers can deduct out-of-pocket medical expenses that exceed 7.5 percent of adjusted gross income. This is down from 10 percent which was the threshold prior to the passage of this legislation.

Effective Immediately

·        Expansion of Child Tax Credit

The new tax law provides for the expansion of the Child Tax Credit from $1000 to $2000 and increases the amount of the refundable portion to $1400.

·        Doubling of Estate Tax Exemption

The Republican tax bill increases the annual estate tax exclusion from $5 million to $10 million ($20 for couples with appropriate tax planning strategies). These amounts are indexed to inflation and will remain in effect until 2025. At this time, in the absence of further legislation, the estate tax exclusion will revert back to the previous base, also indexed to inflation.

·        Increase in Alternative Minimum Tax Exemption

The new tax law provides a break for high income earners who are affected by the Alternative minimum Tax. Under the provisions of the new legislation, the exemption amount is increased from $54,300 to $70,300 for single taxpayers and from $84,500 to $109,400 for married couples filing jointly. In addition, the income threshold at which the tax begins to pause out is increased dramatically – from $120,700 to $500,000 for single filers and from $160,900 to $1 million for married couples filing joint returns.  

Future Start Dates

·        Repeal of Individual Mandate

Although the Affordable Care Act will remain in effect, the provision that requires most Americans to be covered by a basic level health insurance will be repealed on January 1, 2019. As of that date, individuals will no longer be penalized for not carrying health insurance and business will not be required to provide health insurance for their employees.

·        Cancelation of Alimony Deduction for New Divorces

As of January 1, 2019, alimony payments for new divorces will no longer be tax deductible for the person making the payments and the person receiving the payments will no longer have to count them as taxable income.

Businesses

Retroactive

·        Allowance for Immediate Capital Expensing

The new tax law allows for the deduction the full amount of any capital expenditure during the tax year that purchase is made. This provision is retroactive to January 27, 2017 and continues until the end of 2022, at which time it will be phased out at the rate of 20% per year.

Effective Immediately

·        Limitation on Interest Deduction

Beginning this year, the interest deduction will be limited to 30% of earnings before interest, taxes, depreciation and amortization. On January 1, 2022, the reduction of income by depreciation and amortization will drop off and the interest deduction will increase to 30% of income, reduced only by interest and taxes.

·        Allowance for Repatriation of Foreign Income

Under the provisions of the new tax law, foreign earnings that have accumulated overseas will be charged a repatriation tax of 15.5 % for cash assets and 8.0 % for illiquid assets. Although the onetime tax will be levied immediately, companies are given the option of paying the tax bill over a period of eight years.

Future Start Date

·        Provision for Amortization of R&D Investment

As of January 1, 2022, companies will be required to amortize research and development expenditures over a period of five years rather than writing off the entire amount of the expense in the year it is made.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)514-4048 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

Senate and House Compromise on Tax Reform

With a vote of 51 to 49, the Senate voted in favor of its version of HR 1, leading the way to the passage President Trump’s $1.5 trillion tax cut package. Since the approval of the Senate’s tax reform plan follows the approval of the House version, the path is now open for the two houses of Congress to work out their differences and agree on a piece of tax legislation that President Trump can then sign into law. If the process goes as the Republicans hope it will, they will be victorious in approving the most significant tax overhaul in over three decades.

Although the Senate and House tax reform plans target the same issues, they often differ on how these items should be treated. One of the major difference is that the House bill makes the new tax adjustments permanent for both businesses and individuals while the Senate bill provides for the expiration of most of the individual tax changes at the end of 2025. The following is a list of some of the important areas targeted by the Republican tax reform packages with an indication of how the House and Senate plans differ:

·        Both tax plans suggest a significant increase to the standard deduction but differ slightly on the amounts of the increase. The House bill raises the standard deduction to $12,200 ($18,300 for HOH and $24,400 for couples filing jointly) while the Senate bill increases it to $12,000 ($18,000 for HOH and $24,000 for couples filing jointly).

·        The House bill proposes four tax brackets with the top marginal tax rate held at 39.6% while the Senate bill keeps the current seven tax brackets but reduces the top marginal rate to 38.5%.

·        The House bill proposes eliminating the tax deduction for medical expenses while the Senate bill keeps it with a cut-off of 7.5 % for the next two tax years.

·        The House bill increases the child tax credit to $1600 for each child under the age of 17 while the Senate bill increases it to $2000 for each child under the age of 18. Both tax reform plans make the first $1000 refundable.        

While the House and Senate tax plans differ on the key points outlined above they are in agreement on the following items: 1) elimination of the additional personal exemption, 2) elimination of exemptions for spouse and dependents, 3) elimination of the additional deduction for the blind, disabled or elderly (over 65), 4) elimination of the sales tax deduction and/or the state and local income tax deduction, 5) retention of the charitable donation deduction, 6) retention of the property tax deduction with a cap at $10,000, 7) elimination of the tax deductions for home office expenses, unreimbursed employee expenses and tax preparation services 8) elimination of tax deductions for student loan interest and moving expenses and 9) exclusion of the first $250,000 of capital gains from the sale of a home that has been lived in for five out of eight of the previous years (allowed once every five years, House bill subject to income phase out). 

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)514-4048 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

IRS Reverses ACA Declaration Requirement

The IRS has recently announced that it will reverse its position on enforcing the ACA declaration requirement. Although the agency accepted tax returns that failed to indicate healthcare coverage during the 2017 filing season, they have recently stated that this information will be required in order for a return to be processed in 2018. An IRS spokesperson clarified the reason for the change, noting that the process “reflects the requirements of the ACA and the IRS’s obligation to administer the healthcare law.” They also maintain that declaring health coverage at the time a return is filed makes filing easier and reduces the possibility of a refund delay.

The requirements of the Affordable Care Act state that every taxpayer must demonstrate that they have “essential minimum” healthcare coverage. Forms of coverage that fulfill this requirement include Medicare, Medicaid, TRICARE, VA benefits, health insurance provided by an employer, privately purchased health insurance and health insurance obtained though the Health Insurance Marketplace. If one of these forms of coverage is not in place, the taxpayer must either obtain a waiver based on demonstrating a financial hardship or be subject to the assessment of a penalty. The penalty, which is referred to as the shared individual responsibility payment, is the greater of 2.5% of the taxpayer’s adjusted gross income or $695 per adult and $347.50 child up to a maximum of $2085.

Although President Trump signed an executive order earlier this year giving executive departments and agencies the authority to roll back certain aspects of Obamacare, the IRS has actually stepped up enforcement. While 2017 tax returns were processed even when line 61 indicating health care coverage was left blank, this will not be the case in for the upcoming tax season. In fact the IRS recently issued an official statement indicating that the 2108 filing season will be the first time the IRS will not accept tax returns that omit healthcare information. They have said that electronically filled and paper returns with this omission will be thrown out, thus delaying the receipt of any refund associated with the return. In addition to stepping up enforcement for the current tax year, the agency has recently sent out letters to over 130,000 taxpayers who did indicate healthcare coverage on their 2014 and/or 2015 tax returns.

Only time will tell how all of this will play out. Republican Congressmen have launched several attempts to repeal and replace the Affordable Healthcare Act but, to date, have been unsuccessful. This means that the IRS requirement that taxpayers indicate their healthcare coverage on their 2017 tax returns will stand as the 2018 tax season approaches. Although none of the more serious tax collection techniques such as tax liens or tax levies apply to meeting this requirement, the threat of a withheld tax refund may well be enough to force taxpayers into compliance on this issue.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)514-4048 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today

Paying Your Income Tax Bill

With the close of Tax Season 2017 less than a month away, it is likely that many taxpayers will end up being faced with a tax bill in excess of what they are able to pay. When this situation occurs and your tax bill exceeds your available financial resources, the best approach is to face the situation head on. To ignore the problem and hope that it will go away will only make matters worse. Not only will this approach result in an increased back tax balance due to the continued accumulation of penalties and interest, but it could ultimately result in the initiation of a tax lien or some other type of enforced collection activity by the IRS.

One of the easiest options for paying a tax bill when the necessary funds are not immediately available is to request short term administrative extension. This agreement postpones the payment of the tax amount due for 120 days, at which time the balance must be paid in full. However, although payment of the tax balance is postponed, a failure-to-pay penalty of one-half of one percent of the tax amount due will be charged each month during the grace period. Other no hassle payment options include charging the tax debt to a credit card, withdrawing the necessary funds from a retirement account or taking out a bank loan to cover the tax amount owed. When considering any of the aforementioned choices, the cost of borrowing should be weighed against any interest or penalties that will be assessed by the IRS or state tax agency.

In the absence of a borrowing alternative, a taxpayer who is short on financial resources can request setting up an IRS Installment Agreement. Such an agreement provides a means of paying off a back tax balance by making regular monthly installment payments. Although a small origination fee is charged, approval for this tax settlement option is almost automatic as long as the requesting taxpayer owes less than $10,000 and is in otherwise good standing with the IRS. The taxpayer is normally allowed to set the amount of the monthly installment payment as long as it will result in the full balance of the tax debt being paid off within five years form the date the agreement is initiated.  

Tax resolution options which involve settling a tax debt for less than full amount owed are harder to obtain but may be a viable alternative for taxpayers who meet certain specific qualifying criteria set by the IRS. Such partial payment tax settlement options include the IRS Offer in Compromise and the IRS Partial Payment Installment Agreement, among others. In general, the IRS only grants these tax settlement options when they determine that the taxpayer in question is very unlikely to be able to pay the full balance of the tax debt they have accumulated within a reasonable period of time.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today

How to Handle an Income Tax Penalty

The IRS imposes tax penalties for a variety of reasons including failure to meet a filing deadline, failure to pay a tax balance due, failure to make required estimated tax payments and submission of an inaccurate tax return. Since all of these penalties were created for the purpose of enforcing tax compliance, they are normally waived only when a taxpayer can document certain extenuating circumstances that have resulted in a deviation from the tax code. Listed below are some of the common tax penalties handed down by the IRS together with some suggested procedures for obtaining a penalty waiver.

Failure to File Penalty

·        Tax Consequences: Any taxpayer who does not file a completed tax return or a request for a tax extension by the IRS filing deadline will be assessed a Failure to File Penalty equal to 5% of the tax balance owed for each month or partial month that the return is late. This penalty can accrue up to a maximum of 25% of the unpaid tax balance. In addition, any person who fails to submit a tax return within 60 days of the IRS filing deadline will be assessed a minimum penalty of $135 or 100% of the tax balance owed, whichever is less.

·        Penalty Abatement Procedures: The IRS will normally negate the Failure to File Penalty for any taxpayer who has had a clean filing and paying history for the previous three years. A penalty waiver may also be granted when the taxpayer can document certain specific conditions that may have resulted in the tax return not being submitted by the filing deadline. Such conditions, which are collectively labeled as Reasonable Cause Relief, include such events and circumstances as death, a serious illness, a natural disaster, the inability to secure necessary tax information or faulty advice from the IRS or a tax professional.

Failure to Pay Penalty

·        Tax Consequences: A taxpayer who submits a tax return but does not pay the full balance of the taxes owed will be assessed a Failure to Pay Penalty of 0.5% of the tax amount due for each month or partial month that the taxes remain unpaid. This penalty can accrue up to a maximum of 25% of original back tax balance. In any given month, if both the Failure to File and Failure to Pay penalties apply, the combined tax penalty assessment cannot exceed 5% of the tax amount owed.

·        Penalty Abatement Procedures: A Failure to Pay penalty waiver may be granted for the same reasons as those described above under Failure to File. However, it important to note that, although a Failure to Pay or a Failure to File penalty abatement may be granted, the interest on any taxes owed will continue to accrue until the back tax balance is paid in full.

Penalty for the Underpayment of Estimated Tax

·        Tax Consequences: Taxpayers who earn or receive income that is not subject to withholding tax must make quarterly estimated tax payments to cover the tax amounts due for this income. When these payments are not made or are not sufficient to cover the taxes owed, the IRS assesses a Penalty for the Underpayment of Estimated Tax. This is generally equal to 5% of the tax amount owed for each month or partial month that the tax balance is overdue.

·        Penalty Abatement Procedures: The IRS normally waives the Penalty for Underpayment of Estimated Tax if the total amount of the unpaid tax balance is less than $1000 or if at least 90% of the tax balance shown on the current year’s tax return or 100% of that shown on the previous year’s return has been paid. Outside of these conditions, the IRS may abate the Penalty for the Underpayment of Estimated Tax when the taxpayer can prove that it has been calculated incorrectly or that calculating it by a different method would either reduce or eliminate it. This penalty will also generally be waived when the underpayment of estimated taxes is due to extenuating circumstances rather than willful neglect.

Inaccurate Tax Return Penalty

·        Tax Consequences: The IRS may assess a tax penalty when various inaccuracies such as negligence or the understatement of taxes result in an underreporting of the tax amount due. Generally, this penalty is only imposed when the amount shown on a tax return is more than 10% or $5000 less than amount of taxable income that should be shown.

·        Penalty Abatement Procedures: The Inaccurate Tax Return Penalty can sometimes be abated when a taxpayer is able to provide sufficient documentation to show that an error was made despite reasonable efforts to exercise ordinary care and prudence in preparing the return.

Take heart! Although it is best to avoid tax penalties altogether, receiving one is not the end of the world! Consult a certified tax professional to investigate the options available for obtaining a penalty waiver.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

The IRS Roll Back of Obamacare

On January 20, 2017, his very first day in office, President Donald Trump signed an executive order giving the Department of Health and Human Services as well as other federal departments and agencies including the IRS the authority to roll back the enforcement of certain Affordable Care Act requirements. IRS Commissioner John Koskinen responded to this directive almost immediately by announcing that, although the agency was being allowed to use its discretion as far as enforcing the income tax reporting requirements associated with Obamacare, he did not think that the collection of individual responsibility payments would be significantly affected for the 2017 tax season. Recently, however, Koskinen has issued a more specific statement, announcing that the at IRS will, in fact, accept and process 2016 tax returns that do not indicate the status of the taxpayer’s healthcare coverage. Only time will tell how this increased leniency will affect the collection of penalty payments for the current year.

Although one of the central campaign promises of Trump’s candidacy was that he would take immediate steps to repeal the Patient Protection and Affordable Care Act, this is an action must be approved by both houses of Congress and could take a significant amount of time. In addition, the process is very likely to come up against numerous stumbling blocks. For example, the Congressional Budget Office recently issued a report saying that retaining the insurance reforms implemented with Obamacare while repealing the associated subsidies and penalties with would increase both insurance premiums as well as the number of uninsured taxpayers. According to the data collected in this study, premiums would nearly double over the next ten years and the number of people without health insurance coverage would increase to over 30 million. In addition to negative findings such as this, many legislators have indicated that they do not feel comfortable with moving toward a repeal of Obamacare until a suitable alternative is in place.

Faced with time constraints and obstacles such as those described above, Trump signed an executive order giving various federal agencies leniency and discretion in enforcing the existing healthcare directive. The order specifically directs the heads of these organizations to “delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax penalty or regulatory burden” on healthcare providers, health insurers or recipients of health care services. As an agency targeted by the executive order, this language allows the IRS a certain amount of latitude in terms enforcing the income tax reporting requirements specified by the Affordable Care Act. In response, IRS Commissioner John Koskinen has announced that the agency will process 2016 tax returns even when the line item indicating healthcare coverage is left blank, an omission that would previously have resulted in a kickback of the return.

Although taxpayers whose tax returns are processed without indicating healthcare coverage will avoid payment of the individual responsibility payment, it is projected that the change will have little effect on tax revenue collected during the 2017 tax season. While the 2016 shared responsibility penalty can be as much as $2085 or 2.5% of a taxpayer’s adjusted gross income, whichever is greater, it is expected that the overall effect of not collecting the penalty from those who would have owed it under the previous guidelines will be small. This is due to the fact that approximately 90% of taxpayers would not have been assessed the penalty in the first place due to the fact that they have either valid healthcare coverage or a qualifying exemption.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702) 945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

The Jock Income Tax and the 2017 Superbowl

When visitors earn money in a city or state they are visiting, they may be required to pay local and state income taxes on any money they earn in that jurisdiction. This income tax is often called the “jock tax” because it originated in 1991 when the State of California assessed the earnings of Chicago Bulls players who were visiting Los Angeles to play the Lakers in the NBA finals. Following this, Illinois instituted its own “jock tax” but only imposed it on out-of-state players who originated from states that imposed a state income tax on athletes from Illinois. At the present time, most states levy an income tax on visiting athletes. The exceptions are the District of Columbia, which is prohibited by law from taxing nonresidents who work there, and Florida, Texas and Washington, the three states that have no personal income tax.

Fast forward to the Super Bowl 2017 game that was played in Houston, Texas. The fact that Texas does not have a state income tax means that none of the visiting players will be required to pay the “jock tax” on their play-off winnings. This amounts to a very significant tax savings for players of the New England Patriots who earned $107,000 each for their winning Super Bowl performance. Had Super Bowl 51 been played at Levi Stadium in Santa Clara, California, the location of Super Bowl 50, each of these players would have had to pay $14,231 of their winnings in state income tax. Atlanta Falcons players, who earned $53,000 each for their Super Bowl participation, will realize a tax savings of over $7000 compared to what they would have earned if the game had been played in California as it was in 2016.

Although all itinerant workers could technically be charged a state income tax for income earned outside of their state of residence, it is virtually impossible to track all of the thousands of visiting workers who earn income in any given state. Thus, the “jock tax” targets only high profile, high income earners, most of whom are professional athletes. It is this inequitable enforcement that critics point to as one of the major flaws of this particular state income tax assessment. Another major criticism is the difficult burden the “jock tax” places on the athletes who must pay it. For example, professional NFL players play 16 games in a season and receive 16 different checks. Although federal and state income taxes are withheld from each payment, there is much room for an overpayment or underpayment error. Also, since the each player must file a “jock tax” return with most states where they play as a visitor as well as a state income tax return with their state of residence, the tax filing process has the potential to become quite complex.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

Nevada Residency Case Study

Nevada Tax Residency Case Study

When operating Las Vegas Bookkeeping in the state of Nevada we often work with business owners relocating to the state of Nevada to take advantage of the numerous tax benefits offered in the state of Nevada. The following is a modified real-world example of a taxpayer seeking the tax benefits of a no-tax state.

General: The taxpayer is expecting a significant capital gain in tax year in the upcoming income tax year. The gain would be resulting from privately owned, original issue stock from the taxpayers’ current employer. The taxpayer currently lives in southern California but works for an employer located in the state of Nevada. Currently the primary taxpayer has the flexibility to relocate to and be employed in Las Vegas where current earnings and capital gains income will not be taxed.

Authoritative Guidance:  Generally speaking the state of California taxes all residents on their world-wide income. 

A "resident" is defined as:

       every individual who is in the state for other than a temporary or transitory purpose; and

       every individual who is domiciled in California who is outside the state for a temporary or transitory purpose.

( Sec. 17014, Rev. & Tax. Code )

Domicile is defined as the place where the taxpayer has his or her permanent home, and to which he or she intends to return whenever he or she is absent. ( Reg. 17014(c), 18 CCR )

"Residency" is not the same as "domicile." ( Whittell v. Franchise Tax Board (1964) 231 CA2d 278, 41 CRptr 673, ¶202-709) One may be a resident although not domiciled in the state, and conversely, may be domiciled in the state without being a resident. ( Reg. 17014(a), 18 CCR )

The state of California provides a partial list of factors to be considered for determining whether the taxpayer is a California resident.

 

Residency Factors include:

                   the amount of time spent in and out of California;

       the location(s) of the taxpayer's spouse and children;

       the location of the taxpayer's principal residence;

       where the taxpayer was issued a driver's license;

       where the taxpayer's vehicles are registered;

       where the taxpayer maintains professional licenses;

       where the taxpayer is registered to vote;

       the locations of banks where the taxpayer maintains accounts;

       the locations of the taxpayer's doctors, dentists, accountants, and attorneys;

       the locations of the church, temple, or mosque, professional associations, and social and country clubs of which the taxpayer is a member;

       the locations of the taxpayer's real property and investments;

       the permanence of the taxpayer's work assignments in California; and

       the location of the taxpayer's social ties.

 

In review of guidance and court cases related to the determination of residence and California income tax filing requirements there are several key factors that are the primary considerations for determining residency.

Once a California resident, there is the presumption on continued residency until the establishment of a new domicile is proved.

Board of Equalization Appeal Andra Sachs – March 2010

 “Respondent argues that its residency determinations are clothed with a presumption of correctness, that appellant was California domiciliary in 1999, and that this California domicile remains with her until she bears the burden of proving her establishment of a new domicile at a specific physical address outside California in the 2000 tax year at issue on a date that predates her receipt of the Flashcom stock sale proceeds. Respondent argues that appellant's subjective intent is insufficient to overcome this presumption, and that appellant has failed to demonstrate the required objective facts showing that she established through physical residence a non-California domicile and residence before she received the Flashcom stock sale proceeds.”

In some cases, a person may not be domiciled in California but may still be a resident for California tax reporting purposes.  In some cases, the intention of the taxpayer is emphasized in determining California residency.

 California Tax Reporter

“Some cases emphasize the taxpayer's intentions when the taxpayer left the state. In Appeal of Rand, SBE, 76-SBE-042, April 5, 1976, ¶205-430, a California domiciliary who was employed in Libya under a contract that required a commitment of at least 18 months, but that had no definite termination date, was outside the state for other than a temporary purpose. Despite his business contacts with California, including bank accounts and rental property, he did not intend to return to California upon completion of the minimum employment commitment. In Appeal of Hardman, SBE, 75-SBE-052, August 19, 1975, ¶205-294, a professional writer domiciled in California went to England to write a screenplay. His one-way ticket to England, use of professional services in the country, and enrollment of his daughter in an English school, indicated that he intended to remain in England indefinitely and he lost his California residency for income tax purposes”

California Tax Reporting:

A California resident filed a California Income Tax Return to report all world-wide income in any given tax year.  A taxpayer that has a State filing requirement in multiple states generally files a State tax return in California in any other state in which the taxpayer has reportable income. In most cases the state of California provides a tax credit for taxes paid to the other state and receives a copy of the income tax return filed with the other state.   In a year that the taxpayer changes state residency the taxpayer files in both states and reports income in the respective states. In both scenarios, the taxpayer must provide the state of California with a copy of the other state tax return for that year.  In past experience, if the state of California is aware of a large taxable transaction and a change of residency in the same taxable year the state will generally examine the transaction and the change of residency.

Summary and Analysis:

In recent years, the state of California has made significant efforts to identify taxpayers that are improperly escaping tax reporting and payment in the state of California.  This is primarily due to the high- income tax rates in the state of California and the significant tax benefit received from reporting income in either low or no-tax states.  The state of California employs a variety of methods to identify potential under-reporting taxpayers.  These include but are not limited to identification of taxpayers with mortgages and financial accounts in CA, comparisons of property tax and DMV records, searches of California professional licenses, and a variety of other methods. In our experience, the most common action by the state is to send a letter indicating that the state believes that a state tax return should have been filed for a given year and ask for a response from the taxpayer.  At that point the taxpayer must provide the reason for non-filing.

In all cases, residency is a subjective determination made on a case by case basis.

The following are items that should be considered if the taxpayer chooses to change his State of California residency status.

  • Employer documentation supporting the change in the place of employment would support the change in residency.
  • The taxpayer should carefully review the residency factors on page one and make as many of these changes as possible as quickly as possible.  Items that are easily verifiable should be given special attention.  (leases, DMV, professional licenses, etc.)
  • Any drivers and professional licenses should be cancelled in the state of California as soon as possible.
  • As referred to in the court case on page 2, California residency is assumed until there is proof that residency has been changed.  The most obvious indication of a change in residency is proof of residing in the other state through a lease and employment documentation and the replacement of various registrations and licenses.
  • As referred to in California tax reporter section, intent is often a factor in residency determination.  The move and change of residency should appear to be permanent with no immediate current intention to return to California.
  • Time spent in and out of California is a significant consideration in determining California residency. In review of court cases bank and credit card records indicating California purchase transactions are commonly used to determine time spent in the various state.  Careful consideration should be given to these types of transactions.
  • Any 2017 California source income that triggers a 2017 California income tax filing requirement would provide visibility into the Nevada reporting of the gain and increase potential scrutiny.  No 2017 wages or other California income would be ideal.
  • The location of the taxpayers’ spouse and children are one of many factors in determining residency.  The relocation of the family would be ideal but maybe not possible. Efforts to limit the ability to verify the family location would be helpful.  The relocation of the family after the school year would support the intention of the taxpayer to make a permanent change of residency.

As mentioned, a large taxable transaction happening soon after a change in residency may receive scrutiny by the state of California and the determination of residency is mostly subjective and done on a case by case basis.  The best defense is for the state of California not to be aware of the transaction.  If there is no 2017 taxable income in the state of California there would be no requirement that California receive a copy of a state income tax return. If a large portion of the changes listed in the document are made as soon as possible the change of residency would be a supportable position to take on future years tax returns.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

Income Tax Changes Affecting 2016 Tax Returns

Although Benjamin Franklin’s famous statement that “nothing can be said to be certain, except death and taxes” may still be true, his remark definitely does not refer to any of the specifics involved with filing and paying income taxes. In fact, Barbara Weltman, an editor for J.K. Lasser’s Income Tax 2017, recently reminded taxpayers that they should not assume that “what (they) relied on last year is necessarily the same.” Although there are no major changes to the tax filing parameters for 2016 tax returns, there are certain changes to tax penalties, mileage rates, tax exemptions, tax credits and tax brackets that tax filers should be aware of.

The following are some of the changes that affect the filing of 2016 tax returns:

Change in Tax Filing Deadline

Tax Day for 2107 is Tuesday, April 18th. This delay is due to the fact that the normal April 15th filing deadline falls on a Saturday followed by Emancipation Day on Monday.

Increase in Health Insurance Penalty

The 2016 penalty for not having health insurance is $695 per adult and $349.50 per child, with a maximum household penalty of $2085. These tax penalties are up over 100% from those tax penalties imposed in 2015.

Millage Rate Decrease

Taxpayers are allowed to deduct expenses involved with the use of their personal vehicle for certain specific purposes that include medical, charitable causes, moving and business. This tax break can be calculated in one of two ways, either by using the actual costs involved with operating the vehicle to service these various proposes or by using the mileage rate specified by the IRS. The mileage rate for 2016 tax returns has decreased form 57.5 cents per mile to 54 cents per mile for business and from 23 cents per mile to 19 cents per mile for medical and moving related use. It remains unchanged at 14 cents per mile when the vehicle is used for charitable reasons.

Tax Bracket Changes

The income limit for single taxpayers subjected to the maximum tax rate of 39.6% has been raised from $413,200 to $425,050 and from $464,850 to $466,950 for married couples filing jointly. The income limits for all other tax brackets have also been increased slightly.

Higher Personal Exemption

The personal exemption has increased from $4000 to $4050 for single taxpayers with adjusted gross incomes below $259,400 ($311,300 for married couple filing jointly). The income level at which this exemption fades out completely has also been increased.

Possible Refund Delay

Tax refunds will be delayed for taxpayers who are claiming either the Additional Child Tax Credit or the Earned Income Tax Credit. According to the provisions of the Protecting Americans from Tax Hikes (PATH) Legislation that was passed in 2015, refunds associated with tax returns claiming either of these two tax breaks must be held until February 15th in order to give the IRS time to match tax return information with forms W-2 and 1099-MISC submitted by employers.

Passport Revocation for Owing Back Taxes

Beginning this year, the State Department will have the right to revoke the passport of any taxpayer who has a back tax balance in excess of $50,000. This law was passed as an add-on provision of the Fixing America’s Surface Transportation (FAST) Act of 2015.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

Trump's Income Tax Reform Just Around the Corner

Trump’s Income Tax Reform Just around the Corner

Donald Trump has announced that he will begin a major overhaul of the United States tax system as soon as he takes office on January 20th. He maintains that the changes he is suggesting will simplify the tax code, provide tax relief to American taxpayers and benefit the economy by making condition’s more favorable for businesses. According to his plan, these changes will be revenue neutral. They will be paid for by certain other changes to the tax code which will actually increase tax revenue. In particular, his proposal recommends eliminating many of the deductions that are currently available to high income taxpayers as well as closing a number of corporate tax loopholes.

The following are some of the major changes proposed by Trump’s tax plan:

·         Simplifying the tax code for individuals

Trump’s tax plan outlines a simpler tax code by proposing that the number of tax brackets be reduced to four (0%, 10%, 20% and 25%) instead of seven. Individuals earning less than $25,000 and couples earning less than $50,000 would not pay any tax at all, with the net result that over 50% of the population would effectively be removed from all income tax obligations. Taxpayers paying the 10% income tax rate would keep almost all of their current deductions while those in the 20% and 25% brackets would lose some of theirs. In addition to simplifying tax brackets and eliminating deductions, Trump’s tax plan proposes terminating both the Alternative Minimum Tax and the marriage penalty.

·         Eliminating of the death tax

Under current estate tax laws, individual estates in excess of $5,490,000 are subject to taxation with a maximum estate tax rate of 40% when the amount of the taxable estate exceeds $1,000,000. Under Trump’s tax plan, the estate tax will be eliminated altogether.

·         Making the tax code more attractive for business

One of the main components of Trump’s tax plan is to make America more attractive to business by reducing the corporate income tax rate to 15%, a significant reduction from its current rate of over 35%. In addition, it proposes providing pass-through entities with a matching rate by intoducing a special business tax rate within the tax guidelines for personal tax returns. Owners of partnerships, LLCs and certain other business structures are currently taxed at their personal income tax rates which are often in excess of 15%.

·         Eliminating certain loopholes and deductions

A final important part of Trump’s tax plan involves generating income tax revenue by eliminating certain tax loopholes and deductions for wealthy taxpayers and special interests. Included in this list of suggested changes is decreasing the income threshold for the Pease Limitation on itemized deductions and the phase out of personal exemptions and phasing out the life insurance interest deduction for wealthy taxpayers. The proposal also recommends putting a cap on interest deductions for business expenses as well ending tax deferrals for corporate income earned on foreign soil.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. To learn more about the services we provide, visit us at www.lasvegasbookkeeping.com.  Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com  to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.