Practical IRS Tax Insights – January 2019 Newsletter
Here’s some information gleaned from the December Kiplinger Tax Letter.
Thinking of buying a home or refinancing before mortgage interest rates shoot up even higher? You can still deduct mortgage interest on Schedule A of your 1040 if you itemize deductions. (Note that with the increased standard deductions, it’s expected that far fewer taxpayers will itemize.) But the new tax law cut back the break in some cases, depending on the size of the loan, date of the loan and how you use the loan proceeds.
We’ll now turn to some of the changes.
Interest can be deducted on up to $750,000 of total home acquisition debt… indebtedness that is secured by your primary home or a single secondary home and that is incurred to buy, construct or substantially improve the residence. Before tax reform, interest could be deducted on up to $1 million of mortgage debt. The $750,000 limit generally applies to debt incurred after Dec. 15, 2017. Older home mortgage loans are grandfathered in and get the $1-million cap. Ditto for refinancing of pre-Dec. 16, 2017 debt…up to the old loan amount. The $1-million debt limit also applies to home buyers who had a binding contract to purchase a house before Dec. 15, 2017, and who closed on it by March 31, 2018. The treatment of interest on home equity and refinance payout loans is tricky. Before 2018, you could use cash from these loans to pay off credit card debt, buy a car or take a trip, and deduct interest on up to $100,000 of the debt. Those days are gone for both existing and new home-related debt, thanks to tax reform. This crackdown doesn’t apply to home equity loans or payouts secured by a first or second residence and used to buy, build or substantially improve a home. Debt used for these purposes has always been considered acquisition indebtedness. Improvements are substantial if they add value to the home, extend the residence’s useful life or create new uses for the home. Additions and renovations count…basic repairs and maintenance don’t.
One thing that hasn’t changed: The rules for deducting points. Points paid on loans to buy, build or improve your primary home are still generally deductible in the year you pay them. If you’re refinancing, you’ll have to deduct points ratably over the life of the loan. If you sell your home, you can deduct any remaining points in the year of sale. You get a break if you refinance again. The later refinancing triggers the write-off of the balance of the points from your first refinancing, usually. But if you refinance with the same lender, you add points on the latest refinancing to leftover points from the first deal and take the amount over the term of the new loan.
The fate of the deduction for mortgage insurance premiums is up in the air. The write-off was first set to die off over a decade ago, but Congress kept reviving it. Most recently, it was retroactively resurrected in Feb. 2018, but only for 2017 returns. There’s bipartisan support to extend this break for 2018. But time is running out for passage this year, especially with the government shutdown.
Employers will get more time to report worker health coverage for 2018.
Firms with 50 or more full-time-equivalent employees must use Form 1095-C
to report 2018 insurance data for each full-timer to both the Service and the worker. They must also file Form 1094-C with IRS, which requires additional information. Businesses with fewer than 50 employees that provide self-insured medical coverage must comply by using Form 1095-B to report 2018 health coverage information to employees and IRS, and by filing Form 1094-B to transmit the 1095-Bs to IRS. The forms are due to employees by March 4 instead of Jan. 31, IRS says. The due date for sending the returns to IRS remains Feb. 28…April 1 if e-filing.
Don’t expect big hikes in the limits on deductible contributions to HSAs…
health savings accounts…despite a push by the White House to raise the ceilings. For 2018, the cap on deductible contributions to HSAs is $3,450 for account owners with self-only coverage…$6,900 for family coverage. These figures are going up in 2019 because of inflation to $3,500 and $7,000, respectively. A bill that passed the House this summer proposes to almost double the caps to $6,750 for self-only coverage and $13,500 for family coverage, which President Trump would most likely back.
There’s not much support from Democrats, who say HSAs favor the wealthy.
Keep in mind that repeal of the individual mandate penalty begins in 2019.
Congress effectively killed the requirement that individuals maintain health coverage by doing away with the penalties under the individual mandate for post-2018 years. The fines still apply for 2018, so when you file your individual tax return next year, you’ll have to check a box on your return showing you had full-year health coverage, claim an exemption or pay a fine. The fine is typically the greater of $695 per person
or 2.5% of the excess of household income over the threshold amount for filing a return.
Most individual tax provisions in the new tax law expire after 2025.
They include tax rates and bracket changes, increased standard deductions,
repeal of personal exemptions, pared-back Schedule A itemized deductions,
the 20% write-off for owners of pass-throughs and the higher estate tax exemption. But three changes affecting individuals are permanent: Inflation adjustments of tax brackets and various other tax breaks based on a chained consumer price index. Repeal of the penalties under Obamacare’s individual mandate for post-2018 years. And the expansion of 529 college savings accounts to allow tax-free distributions of up to $10,000 per student per year to help pay tuition for K-12 education. Note that the $10,000 cap doesn’t apply to 529 plan withdrawals to pay for college.
A Calif. retail seller of marijuana can deduct only the cost of the drugs…
what it paid for the inventory and its transportation costs in acquiring the weed, the Tax Court says. Other expenses aren’t deductible, even though pot is legal in Calif. The firm, which operates the country’s largest medical marijuana dispensary, argued that a federal statute that bars write-offs for sellers of controlled substances that are illegal under U.S. law covers only illegal drug traffickers, not legal vendors. Not surprisingly, that claim was rejected by the Court, which hinted that only Congress could change the law (Patients Mutual Assistance Collective Corp., 151 TC No. 11). Pass-through entities will have to report more information on K-1s. IRS has released drafts of the 2018 K-1 forms that partnerships, multimember LLCs, S corporations and trusts send to their owners. The new forms have lots of revisions to reflect changes in the tax law. For example, pass-throughs now have to report data on the K-1 to help their owners figure the new 20% qualified business income write-off.
Among the items reported: The owner’s share of the firm’s qualified business income, W-2 wages paid by the business and the unadjusted basis of depreciable property. A company and its owner owe $5,000 for filing a fraudulent Form 1099 for an employee who they intentionally misclassified as an independent contractor.For years, the worker got a W-2. But when the business hit the skids, the owner tried to shrink the firm’s payroll taxes by issuing him a 1099. The amount reported on the form was also wrong. The employee sued and was awarded monetary damages by a federal district court (Czerw v. Lafayette Storage & Moving Corp., D.C., N.Y.).
IRS’s interest rates on taxes are increasing for the first quarter of 2019.
On overdue taxes, the Revenue Service will charge 6%. A higher 8% rate
will be applied to corporations that owe more than $100,000 in back taxes.
On refunds, the agency will pay 6% to individuals and 5% to corporations.
For corporate refunds that exceed $10,000, the rate on the excess will be 3.5%. There is a 45-day waiting period before IRS will start paying interest on refunds.
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