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Thursday
Jun282018

2018 draft Form 1040 reduced to "postcard" size but requires more schedules

Draft 2018 Form 1040, U.S. Individual Income Tax Return

The new draft version of the 2018 Form 1040, obtained by Thomson Reuters Checkpoint from congressional staff, is markedly different from the 2017 version of the form. In addition to reflecting a number of changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017), the draft form has been significantly reduced in size and contains far fewer lines than its predecessor. However, this reduction in length is countered by the fact that the draft form has six new accompanying schedules.

Identifying information. The 2018 draft Form 1040 eliminates spaces from the 2017 version of the form where a taxpayer with a foreign address would specify the foreign country name, province, and postal code, and instead directs a taxpayer with a foreign address to attach a new Schedule 6, "Foreign Address and Third Party Designee", and provide this information on that Schedule.

Dependents. On the 2018 draft Form 1040, in addition to the checkbox reflecting whether a dependent qualifies for the child tax credit, a second checkbox has been added for a taxpayer to reflect whether a dependent qualifies for the new "credit for other dependents".

Adjusted gross income. The 2018 draft Form 1040 contains fewer entries than the 2017 Form 1040 for types of income received by the taxpayer. The omitted items were moved to new Schedule 1, "Additional Income and Adjustments to Income".

Specifically, the following income items have been moved to Schedule 1: taxable refunds, credits, or offsets of state and local income taxes; alimony received; business income or loss; capital gain or loss; other gains or losses; rental real estate, royalties, partnerships, S corporations, trusts, etc.; farm income or loss, unemployment compensation; and other income.

The 2018 draft Form 1040 does not reflect any adjustments to income that appear on the 2017 Form 1040 (e.g., educator expenses, health savings account deduction). Rather, all adjustments that remain in effect for 2018 were moved to the new Schedule 1.

The moving expense deduction entry has also been modified to reflect that, under the TCJA, it is only available for members of the armed forces.

The lines for the pre-2018 tuition and fees deduction and the pre-2018 domestic production activities deduction are shown on Schedule 1 as "Reserved".

Deductions. Similar to the 2017 form, the 2018 draft Form 1040 contains a line where taxpayers indicate whether they are claiming the standard deduction or itemized deductions and provides the 2018 standard deduction amounts in the margin. It is widely expected that significantly more taxpayers will claim the standard deduction in 2018 as the standard deduction amounts were nearly doubled by the TCJA.

The 2018 draft Form 1040 also has a new line for the Qualified Business Income (QBI) deduction.

Notably, the entry for exemptions has been removed from the draft form as this deduction was suspended by the TCJA.

Tax. The 2018 draft Form 1040 contains fewer lines relevant to calculating a taxpayer's total tax, instead moving the entries to a new Schedule 2, "Tax".

Specifically, the following tax items were moved to Schedule 2: tax on child's unearned income (i.e., kiddie tax); tax on lump-sum distributions; other taxes; alternative minimum tax; and excess advance premium tax credit.

Nonrefundable credits. The 2018 draft Form 1040 contains an entry for "child tax credit/credit for other dependents" and has moved the other items to new Schedule 3, "Nonrefundable Credits".

Specifically, the following credits were moved to Schedule 3: foreign tax credit; credit for child and dependent care expenses; education credits; retirement savings contribution credit; child tax credit and credit for other dependents; residential energy credit; general business credit; credit for prior year minimum tax; and other credits.

Observation: The child tax credit and credit for other dependents appears both on the 2018 draft Form 1040 as well as on Schedule 3. Presumably, this duplication will be resolved in a future draft.

Other taxes. The lines for "other taxes" on the 2017 Form 1040 were moved to a new Schedule 4, "Other Taxes".

Specifically, the following "other taxes" were moved to Schedule 4: self-employment tax; social security and Medicare tax on tip income not reported to employer; uncollected social security and Medicare tax on wages; additional tax on IRAs, other qualified retirement plans, and other tax-favored accounts; household employment taxes; repayment of first-time homebuyer credit; health care: individual responsibility; additional Medicare tax; and net investment income tax.

Schedule 4 also reflects a new item, "Section 965 net tax liability installment from Form 965-A". This refers to the new Code Sec. 965 transition tax on the untaxed foreign earnings of certain "specificied foreign corporations" as if those earnings had been repatriated to the U.S., which taxpayers can elect to pay in installments over an 8-year period.

Other payments and refundable credits. The 2018 draft Form 1040 retains entries for the earned income tax credit, the additional child tax credit (denoted by the relevant Schedule, "Sch 8812"), and the American opportunity credit (denoted by the relevant Form, "Form 8863"). Other refundable credits appearing on the 2017 Form 1040 in the section titled "Payments" were moved to a new Schedule 5, "Other Payments and Refundable Credits".

Specifically, the following refundable credits were moved to Schedule 5: the net premium tax credit, the credit for federal tax on fuels; "amounts from Form 2439" (i.e., a shareholder's credit for capital gains tax paid by a mutual fund); and the health coverage tax credit.

With respect to tax payments, the 2018 draft Form 1040 has a line for federal income tax withholdings. Other payment types reflected on the 2017 Form 1040—the amount paid with request for extension to file, and excess social security and tier 1 RRTA tax withheld—were moved to Schedule 5.

Third party designees. The 2018 draft Form 2018 eliminates the "Third Party Designee" section that had previously appeared on the 2017 Form 1040, where a taxpayer would specify whether another person is allowed to discuss the return with IRS and, if so, provide that person's name, phone number, and personal identification number (PIN). The 2018 draft Form 2018 instead provides a checkbox where a taxpayer can check "3rd Party Designee".

Although the 2018 draft Form 2018 doesn't provide a reference to Schedule 6 next to this checkbox, presumably the taxpayer would provide the designee information on that Schedule, which has entries for the designee's name, phone number, and PIN similar to the 2017 Form 1040.

 

Friday
Jun012018

IRS Urges Paycheck Checkup

IRS has urged 2-income families and those who work multiple jobs to complete a "paycheck checkup" to verify they are having the right amount of tax withheld from their pay. (IR 2018-124) Following passage of the Tax Cuts and Jobs Act, checking withholding amounts has become more important, the agency said. "Individuals with more complex tax profiles, such as two incomes or multiple jobs, may be more vulnerable to being under-withheld or over-withheld following these major law changes", IRS said. To conduct a checkup, taxpayers should use the Withholding Calculator which can be accessed here.

 

Wednesday
May302018

Taxpayer wasn't in the business of flipping houses so couldn't deduct expenses

Samadi, TC Summary Opinion 2018-27

The Tax Court has determined that a taxpayer who decided to flip houses with a group of friends and family and obtained his real estate license wasn't entitled to mileage deductions for taking members of the group to see potential properties. The Court found that the taxpayer's real estate activity didn't rise to the level of a trade or business where the group never actually purchased any properties and the taxpayer never earned any real estate commissions.

Background. Code Sec. 162(a) generally allows a deduction for ordinary and necessary expenses paid or incurred in connection with carrying on a trade or business. Whether a taxpayer's activities constitute the carrying on of a trade or business requires an examination of the facts and circumstances of each case. (Groetzinger, (S Ct 1987) 59 AFTR 2d 87-532)

To be engaged in a trade or business, the taxpayer must be involved in the activity with "continuity and regularity" and for the primary purpose of generating income or profit. "The taxpayer's primary purpose for engaging in the activity must be for income or profit." (Groetzinger)

Facts. In 2010, Mr. Samadi, his brother, and three other individuals (collectively, the group) decided to flip houses—buy homes, renovate them, and sell them for a profit. He became a licensed real estate agent in 2010 and continued to be licensed during 2013 and 2014 but did not earn any commissions from selling real estate in 2013 or 2014. Samadi researched potential investment properties for the group; and because he was a licensed real estate agent, he had access to properties that were for sale.

The group decided to look for potential investment properties in West Sacramento, California, where Samadi lived, because the group expected him to manage the investment properties. He prepared mileage logs for 2013 and 2014 to document the extensive mileage he drove to see the potential investment properties. According to the mileage logs, he drove 24,882 miles in 2013 and 25,220 miles in 2014, driving himself, his brother, and other members of the group to see various properties.

Samadi didn't show any potential investment property to the group during the last four months of 2013 or 2014, and the group did not buy any investment property in either year because its members couldn't agree on any of the potential investment properties Samadi showed them.

Samadi had no gross receipts from his real estate activity for either year, and reported losses from the activity on his Schedules C for 2013 and 2014 of $15,719 and $22,502. IRS audited Samadi's 2013 and 2014 returns and disallowed deductions relating to his real estate activity.

At issue was whether Samadi's real estate activity during 2013 and 2014 rose to the level of carrying on a "trade or business" with respect to which he could claim business expense deductions. Samadi argued that he was a real estate agent during 2013 and 2014, that he was acting in that capacity when he showed the group the potential investment properties, and that any expenses incurred in helping the group see the potential investment properties were deductible business expenses.

No trade or business. The Tax Court sided with IRS, finding that while Samadi was a licensed real estate broker during 2013 and 2014, he wasn't in the trade or business of being a real estate agent during those years. Notably, he didn't earn any commissions during those years, and there was no other evidence to suggest that he was continuously and regularly buying and selling real estate or was a real estate agent to clients.

The Court found that in 2013 and 2014, Samadi and the group were attempting to start a business of flipping houses, but were at most in the "exploratory or formative stages". The Court cited a number of cases for the proposition that carrying on a trade or business requires more than initial research—it requires that the business have actually commenced. (Dean, (1971) 56 TC 895)

Accordingly, since the real estate activity didn't rise to the level of a trade or business, the Court held that Samadi wasn't entitled to deduct any Code Sec. 162(a) expenses, including car and truck expenses, incurred in connection with his real estate activity.

References: For trade or business expenses, see FTC 2d/FIN ¶ L-1000; United States Tax Reporter ¶ 1624

Wednesday
May162018

IRS warns about new twist on banking tax scam

 

By Michael Cohn: Accounting Today

The Internal Revenue Service issued a warning Thursday about a new variation on a scam involving requests by criminals who pretend to be working for the IRS asking for bank information from international taxpayers and non-resident aliens.

 The crooks mail or fax a letter to unsuspecting victims asking them to fill out a copy of a Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting,” and saying they need to fax it back to the criminals who are impersonating IRS employees. The letter acknowledges the recipient is exempt from withholding or reporting income tax but insists they need to authenticate their information with the IRS.

The Form W-8BEN is a legitimate U.S. tax exemption document related to the Foreign Account Tax Compliance Act, also known as FATCA. But the IRS noted it can only be submitted through a withholding agent. In the past, scammers have targeted nonresidents of the U.S. using the form as a way to elicit personal details such as passport numbers and PIN codes. The legitimate IRS Form W-8BEN doesn’t ask for any of that information. The bogus letter or fax also refers to a Form W9095, which doesn’t exist, the IRS pointed out, adding that the agency doesn’t require recertification of foreign status.

Wednesday
May022018

IRS Addresses 'Tip Boxes' 

  Opinions expressed by Forbes Contributors are their own.

In a recently released IRS Chief Counsel Memorandum, the IRS addressed cash amounts distributed from “tip boxes.”

As the IRS described the facts, the taxpayer engaged individuals to perform services on its premises; the taxpayer classified the individuals as volunteers, and it did not pay those people compensation or benefits. However, the individuals received cash payments from amounts that customers placed in “tip boxes” near where the services were performed.

As the IRS explained,

Taxpayer places the ‘tip boxes’ to encourage customers to contribute cash amounts to the individuals. Taxpayer does not require customers to make cash contributions and customers have discretion on how much cash to contribute (including zero contribution).

At the end of each shift, then, the individuals decided how to allocate the tip box.  Here, the there was no evidence that the Taxpayer knew the actual amounts received, nor did it issue Forms W-2 or include those amounts on Forms 941.

During an audit, the IRS determined that the volunteers should be treated as employees for FICA tax purposes; consequently, the IRS issued a Letter 3523 to the taxpayer.

Shutterstock

The two questions posed by the memorandum were as follows: (emphisis added)

1. Whether cash amounts distributed to individuals from “tip boxes” are properly classified as tips under the Internal Revenue Code (Code) and subject to Federal Insurance Contributions Act (FICA) tax.

2. Whether cash amounts distributed to individuals from “tip boxes” are subject to notice and demand procedures under section 3121(q) or whether taxes on cash amounts should be included in Table 3 of Letter 3523, Notice of Employment Tax Determination under IRC § 7436.

(footnotes omitted).

Section 3121(q) provides that “tips received by an employee in the course of his employment shall be considered remuneration for such employment . . . .” And, although employers are generally required to deduct and pay over the employee portion of the FICA tax, section 3102(c)(1) provides a special rule for tips. Under that rule, among other things, the employer’s obligation is applicable only to the amount of tips included in a written statement provided by the employee to the employer under section 6053(a).

The term “tips,” however, is not defined in the Code or the regulations. The employer’s classification of the payment as a “tip” is not determinative. However, the IRS explained in Revenue Ruling 2012-18 that the absence of any of the following factors casts doubt on whether the payment is a tip:

(1) the payment must be made free from compulsion;

(2) the customer must have the unrestricted right to determine the amount;

(3) the payment should not be the subject of negotiation or dictated by employer policy; and

(4) generally, the customer has the right to determine who receives the payment.

Here, the IRS found that the four factors were present.

Thus, once the amounts were properly identified as “tips,” the FICA timing rules applied. Because the tips were not reported to the employer (as provided in section 6053(a)), as the memorandum explained, “they are deemed to be paid on the date on which the Service issues a notice and demand under section 3121(q) for the taxes to the taxpayer.” Therefore, “the tips are not subject to the employer share of FICA tax until the Service issues a notice and demand under section 3121(q).”

Procedurally, then, the IRS explained that:

The Service should issue Letter 3523 to Taxpayer based on the worker classification determination, and should identify in Table 1 the individuals the Service determined should be reclassified as employees. However, tax on the cash amounts received by the individuals should not be included in Table 3 of Letter 3523 because the tips are deemed paid only after the Service issues a notice and demand under section 3121(q). Thus, the only issue that would be subject to Tax Court jurisdiction would be the proper worker classification of the individuals listed in Table 1.

However, if the amount reported by an employee to the employer (see § 6053(a)) was properly characterized as a tip, it would be deemed paid at the time of the statement and should be included on the Letter 3523. Moreover, “if an amount characterized by an employer as a tip was determined not to be a tip (for example, it was a service charge) tax on the amount should be included in Table 3 at the time Letter 3523 was issued.”

It is important to note that, Letter 3523, which was formally titled, “Notice of Determination of Worker Classification,” is now entitled “Notice of Employment Tax Determination under IRC § 7436.”

Please note that Chief Counsel Advice memoranda cannot be used or cited as precedent. The CCA Memorandum is Number 201816010 (Dec. 4, 2017; released Apr. 20, 2018); you can find it hereThis is only a summary of the CCA and some portions have been omitted or edited -- if you need advice in this area, please review the CCA in its entirety and consult a tax attorney.

Posts are not legal or tax advice & should not be relied upon. Case results depend on facts unique to each case. If you need legal or tax advice, consult a lawyer.

Link to original Forbes Article.

Link to Office of Cheif Counsel Internal Revenue Service Memorandum