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PILLA TALKS TAXES - Featured Article
_________________________________________ 

HOW THE IRS WILL LEVERAGE ITS
MASSIVE INFORMATION

Big Data Meets Big Government 

by Daniel J Pilla  

 

One of the reasons that identify theft is considered by the Treasury Inspector General for Tax Administration to be the crime of the century—and why I maintain that it cannot be stopped—is because of the IRS. The IRS makes more and more demands for more and more information about more and more aspects of people’s businesses and private lives every day. There is no such thing as personal privacy these days. That the IRS sends citizens a so-called Privacy Act Notice” in every one of its mailings is a farce. The IRS lays more of a claim to more of your data without court authority than any other government agency. And to make matters worse, they share the data with any other federal, state or local government agency claiming an interest, including foreign governments.

 
A River of Data

This year alone, there will be about 152 million individual tax returns filed with the IRS. There will be roughly another 100 million business tax returns filed. There will be millions more miscellaneous tax returns, including trust, estate and gift tax returns. And on top of that, over 3.6 BILLION information returns (Forms W-2, 1099, etc.) will be filed with the IRS over the next couple of weeks. There is quite literally a river of data flowing into the agency every year. The flow cannot be stopped, and what’s worse, as far as the IRS is concerned, they need even more data.

For example, one of the six Strategic Goals” presented in the IRS’s 2018-2022 Strategic Plan is to increase its access to data, and use that data more effectively to drive its agency-wide decision making, as well as case evaluations and selections for enforcement purposes. See: IRS Publication 3744 (4-2018). This is consistent with the previous five-year plan, which presented the overarching goal of becoming a data driven agency.”

Indeed, the IRS is awash in data. The 2018-2022 Strategic Plan boasts that the IRS’s volume of data was 100 times larger in 2017 than it was ten years prior. In 2018, the IRS Criminal Investigation unit alone collected 1.67 petabytes of data from various sources. A petabyte is 1,099,511,627,776 bytes, or 1,024 gigabytes of data. I’m told that approximately 900,000 plain text files can fit into a single gigabyte. The number of users in the IRS with access to that data has increased 23 times (Strategic Plan, pg 19) in the past ten years.

Managing Massive Data

How do you manage, process and assimilate such a massive amount of data to the point where it becomes usable? The 2018-2022 Strategic Plan expresses the goal to invest in analytics and visualization software and tools, and develop processes to support analytics in IRS operations” (Strategic Plan, pg 20). The end game is presented in these words:

Advancements in how data is collected, stored, accessed and analyzed will allow us to deploy data better. We’ll standardize our data processes and protocols and encourage collaboration among all IRS business units. Increased interoperability of data systems and sources will enhance the secure and seamless flow of data to enable greater authorized access to information. We’ll invest in training to develop more advanced analytics skill sets across the IRS, and use data to improve our business processes. Strategic Plan, pg 19.

The investment in analytics was recently undertaken—in a big way.


Big Government, Meet Big Data

On September 27, 2018, the IRS entered into a contract with Palantir Technologies of Palo Alto, CA, to handle the task of data assimilation. The contract calls for Palantir to provide hardware, software and training to IRS employees to capture, curate, store, search, share, transfer, perform deconfliction, analyze and visualize large amounts of disparate structured and unstructured data.” IRS Contract Proposal, Performance Work Statement, January 11, 2017, pg 1.

Palantir is to build and train the IRS to use a unified supercomputer to:

search, analyze, visualize, and interact with a wide variety of disparate data sets so users will be able to leverage the platform to perform advanced analytics, such as link, pattern, statistical, behavioral, and geospatial analysis on an investigative platform that is scalable and interoperable with existing IRS equipment and systems. Ibid, pg 2.

What kind of data are we talking about? The contract proposal specifies the following data formats:

·         Oracle, MySQL, and PostgreSQL databases;

·         Delimited files (.csv, .dsv, .log, or .txt);

·         Excel files (.xls, .xlsx);

·         GraphML files (.graphml, .xml);

·         IVML files;

·         Email files (.eml, .pst, .mbox, .msg, .ost, .txt); and

·         PCAP files (.pca, .pcap, .pcp). Ibid, pg 20.

Ingesting Massive Amounts of Data

The contract proposal goes on to state exactly what the IRS is looking for. The need is for an analytical platform with a strong storage and indexing power allowing for rapid integration and analysis of ultra-large scale data sources.” Ibid, pg 2. Specifically, the system must meet the following criteria:

·         Allow for the rapid ingestion of massive amounts of data.

·         Users should be able to immediately use the imported data in the imported format to perform queries, analysis and identify links.

·         Allow users to drill down on massive amounts of disparate data to find connections.

·         Provide algorithms and capabilities that identify the key players and their roles for the user.

·         Allow users to visualize connections from millions of records with thousands of links by grouping data visualization by the commonalities and roles. Ibid, pg 20.

This system is intended to allow the IRS to meaningfully link tens of millions of tax returns, billions of information returns, and trillions of bank and credit card transactions, phone records, and even social media posts. For example, if a U.S. citizen moves money from a Swiss bank to some other offshore bank, then uses credit or debit cards to spend the money in the U.S., Palantir’s software can link those transactions. It could also flag a person whose tax return shows relatively low annual income but whose social medial posts indicate something entirely different. A 2015 IRS privacy report reveals that since 2013, Palantir has had access to personal information including passport numbers, text messages, criminal histories, and mothers’ maiden names. Case Lead Analysis, PIA ID No. 1120, July 28, 2015.

This is exactly the kind of data analysis it will take to establish the IRS’s so-called up-front tax system,” which I describe at length in chapter 2 of How to Win Your Tax Audit. Under that system, the taxpayer is essentially removed from the tax preparation process because the IRS knows everything there is to know about your personal, business and financial affairs to the point where they prepare the return for you. How’s that for tax simplification?

The Cost of Spying

Since 2004, Palantir provided the federal government with various software platforms for the CIA, the Department of Justice, and the Department of Defense. All of it is related directly to enhancing the government’s data analysis capabilities.

The IRS began working with Palantir in 2013. The agency spent $30.8 million on a five-year contract, and at that time granted Palantir access to files for more than 1 million people, according to a July 28, 2015 audit report. That contract provides the IRS with access to spy software for use by Special Agents (criminal investigators) to generate leads, identify schemes, uncover tax fraud, and conduct money laundering and forfeiture investigative activities.” Case Lead Analysis, PIA ID No. 1120, July 28, 2015, pg 4. 

As far as the IRS’s September 2018 deal is concerned, the federal government will pay Palantir $98,750,546.94 over seven years to fulfill the contract. My question is, why the extra 94 cents? 

 

This is a portion of an article from the January 2019 issue of Pilla Talks Taxes Newsletter. Subscribers to Pilla Talks Taxes are able to read the full article and rest of the newsletter when they log into their subscription account on their non mobile device. http://taxhelponline.com/subscriber-login.html 

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

An email address is needed to recieve this newsletter.  MORE INFO

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ARTICLES FOUND IN January 2019

PILLA TALKS TAXES ISSUE:

 

HOW THE IRS WILL LEVERAGE ITS MASSIVE INFORMATION
    Big Data Meets Big Government

WHAT YOU NEED TO KNOW ABOUT
DEDUCTIONS FOR 2018
The Tax Cuts and Jobs Act Affects Itemized Deductions

IRS ISSUES GUIDANCE ON BUSINESS MEALS
Meal Expenses for Businesses Remain Deductible

JOBS ACT GIVES SMALL BUSINESSES
MORE WRITE-OFFS
Section 179 Deduction Was Expanded
 

THE FRENCH GAS TAX MAY BLOW UP - IN OTHER COUNTRIES

                                       by Merrill Mathews, Ph. D.

 

 

 

 

Missed a prior featured article?

Here are links to some of the favorites:

FIVE THINGS EVERY CITIZEN
NEEDS TO KNOW ABOUT IRS CONTACTS

 

LEVY OF SOCIAL SECURITY BENEFITS

 

HOW LONG DO I KEEP TAX RECORDS?

 

CHANGE IN POLICY ON
ENFORCEMENT OF STRUCTURING LAW

Laws Pertaining to Moving Your Money
from Account to Account

 

WHAT EVERY CITIZEN NEEDS TO KNOW 
ABOUT RETIREMENT FUND DISTRIBUTIONS

The Tax Consequences of Taking Your 401(k) or IRA  

 

"I'M FROM THE IRS... -And You're Going to Jail!"

 

PASSPORTS AND THE IRS
  They Have More in Common Than You Might Think

 

END OF THE YEAR TAX PLANNING
  9 Simple Steps That Can Cut Taxes and Pain

 

AVOIDING PENALTIES UNDER OBAMACARE

 



MASTER INDEX OF PILLA TALKS TAXES

RESEARCH REPORTS, ARTICLES

Looking for a specific issue or article? 
Single Issues available for download, $15.95 per issue.

Contact us to order. 1-800-553-6458

 

 

 

PILLA TALKS TAXES - Featured Article
_________________________________________ 

DEDUCTIBLE MEAL EXPENSES

What's Left After the Jobs Act?

 

In last month’s issue of PTT, I discussed the changes to §274(a) brought on by the Tax Cuts and Jobs Act. The law eliminated entertainment” expenses, regardless of whether they were either directly related to” or otherwise associated with, the active conduct” of a business. Code §274(a) (prior to the Jobs Act amendment.) As stated in the article, no entertainment” expenses are allowed under §274(a), period. 

The key question I addressed is what is allowed as meal expenses. I answered that question and further distinguished between entertainment expenses and business meals. My conclusion is that meal expenses incurred in a clear business setting, not incidental to or associated with an entertainment activity, are still deductible. I draw my conclusion from the cases and regulations that distinguish between meals and entertainment. 

But it is also important to understand that while the Jobs Act eviscerated §274(a) as to entertainment expenses, §274(e) continues to allow deductions for meals and limited entertainment expenses within the narrow scope discussed below. Thus, what was disallowed under §274(a) may be allowable under §274(e), depending on the facts.  

The following is a breakdown of the provisions of §274(e). 

1. §274(e)(1). 50% deduction allowed for food and beverages provided to employees by employers on employer premises.

2. §274(e)(2). 100% deduction for meals and entertainment expenses treated as employee compensation and reported on Form W-2, such as employer paid vacations. The excess expenses for the company aircraft over the amount of the compensation included in income for specified” employees remain completely disallowed.

3. §274(e)(3). 100% deduction for reimbursed meals and entertainment expenses under an accountable plan.

4. §274(e)(4). 100% deduction for non-discriminatory social and recreational expenses for employees, such as holiday parties and company picnics.

5. §274(e)(5). 50% deduction for meals and 100% deduction for entertainment other than meals in connection with business meetings of employees, stockholders, directors, etc. 

6. §274(e)(6). 100% deduction for entertainment other than meals and 50% for meals in connection with §501(c)(6) Business League meetings, such as chamber of commerce, real estate board and certain professional organizations.

7. §274(e)(7). 100% deduction for meals and entertainment for items made available to the public, such as the distribution of samples, complimentary goods, etc.

8. §274(e)(8). 100% deduction for costs of meals and entertainment sold to customers in the ordinary course of business.

9. §274(e)(9). 100% deduction for meals and entertainment included in income of non-employees, with the same limitation as for employees in item 2 above, that being expenses for the company aircraft in excess of the amount included in certain non-employees’ income, remains completely non-deductible.

Section 274(n) provides a 50% limitation for all food and beverages with the exception of those in §274(e)(2),(3),(4),(7),(8), or (9) (see list above) and for certain crew members, drivers, and other special workers. Thus, allowable meals are subject to the 50% haircut unless they fall under one of the exceptions of §274(e)(2),(3),(4),(7),(8), or (9). 

And here’s yet another twist on this morass. The percentage allowed as a deduction for entertainment expenses under §274(e)(5) went from 50% to 100%. Thus, entertainment continues to be allowed, and at even a higher percentage, when incurred in the narrow fact scenario presented there.

The documentation required to support a deduction for meals and entertainment is strict. Section 274(d) requires detailed substantiation to support any meal or entertainment expense deduction. Per §274(d)(4), the substantiation consists of the following: 

1. The amount of the expense, 

2. The time and place of the travel, meal, entertainment, amusement, recreation, 

3. The business purpose of the expense, and 

4. The business relationship to the taxpayer of persons fed or entertained. 

A detailed log or contemporaneous notes written directly on receipts are essential to carrying this burden of proof. See my book, How to Win Your Tax Audit for more on this issue.

With more review and changes to come, make sure you keep up with the latest changes by having a subscription to this newsletter, Pilla Talks Taxes.

    

This is a portion of an article taken from July 2018  issue of "Pilla Talks Taxes."  
Newsletter subscribers can read and download the entire article by logging in at  https://www.taxhelponline.com/subscriber-login.html

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

An email address is needed to recieve this newsletter.  MORE INFO

10 issues per year. $99.00 per yr Order Now!

 

 

 

Missed a prior featured article?

Here are links to some of the favorites:

FIVE THINGS EVERY CITIZEN
NEEDS TO KNOW ABOUT IRS CONTACTS

 

LEVY OF SOCIAL SECURITY BENEFITS

 

HOW LONG DO I KEEP TAX RECORDS?

 

CHANGE IN POLICY ON
ENFORCEMENT OF STRUCTURING LAW

Laws Pertaining to Moving Your Money
from Account to Account

 

WHAT EVERY CITIZEN NEEDS TO KNOW 
ABOUT RETIREMENT FUND DISTRIBUTIONS

The Tax Consequences of Taking Your 401(k) or IRA  

 

"I'M FROM THE IRS... -And You're Going to Jail!"

 

PASSPORTS AND THE IRS
  They Have More in Common Than You Might Think

 

AVOIDING PENALTIES UNDER OBAMACARE

 



MASTER INDEX OF PILLA TALKS TAXES

RESEARCH REPORTS, ARTICLES

Looking for a specific issue or article? 
Single Issues available for download, $15.95 per issue.

Contact us to order. 1-800-553-6458 

 

 

PILLA TALKS TAXES - Featured Article
_________________________________________ 

END OF YEAR TAX PLANNING

9 Simple Steps That Can Cut Taxes and Pain

With the end of the year fast approaching, you’re probably wondering what you might do to cut your taxes. If you wait until April to start thinking about this, it’s just too late. Here are some ideas to get you moving in the right direction now. 

1. Pay state income taxes before December 31.

Many people wait until April 15 to pay their state income taxes, since that’s when they file their state tax returns. However, if you pay your state income taxes in 2018, you can’t claim the deduction for those taxes until you file your 2018 income tax return in 2019. Thus, you have to wait an entire year before getting the tax benefit of the expense. By paying your state taxes now, you get a deduction for those taxes in 2017, one year sooner than you’d otherwise realize. 

2. Review your wage withholding or estimated payments.

Eighty-five percent of all taxpayers get a tax refund when they file their tax returns. The average refund is about $3,000. If you get a tax refund, it doesn’t mean the government got religion and decided to give you free money. It means you paid more than you owe. If you got a refund in 2017, you need to examine your withholding situation going into 2018 to make sure you don’t overpay. 

Whether you’re an employee or a self-employed person, sit down now and do some preliminary calculations on your tax liability. Figure out if you’ve overpaid. If so, you need to adjust Form W-4 (for wage earners) or your estimated payments (for self-employed people). 

Keep in mind that no law requires you to pay more taxes than you owe. For withholding purposes, you avoid under-withholding penalties if you pay either 100 of last year’s tax (2016) or 90 percent of this year’s tax (2017), whichever is less. Use that yardstick to guide you in adjusting your withholding for 2018. 

3. Count your money now.

Each year, millions of people are blindsided come April 15 with surprise tax liabilities they can’t pay. Don’t wait until March or April to start figuring your tax, especially if 2017 was a particularly good year. 

It is important to sit down now and examine your 2017 financial situation. If there were substantial changes to your economic condition, that may increase your tax burden. If you don’t have the money to cover the tax, you’ll wind up as one of the millions facing enforced tax collection. 

Get a good handle on what you’re going to owe. If you figure it out now, you have four and a half months to put a plan together to pay the tax. If you don’t, you could be hit over the head in April. In my experience, it’s that kind of shock that causes people to start making critical mistakes in how they handle their tax burdens. Often, it leads to years of hassle and harassment from the IRS. 

4. Review your financial portfolio.

One of the biggest problems with our tax system is the unfair treatment it affords to investment gains and losses. If you win with your investment, the IRS stands next to you with its hand out to get its “share” of your success. If you lose, you are, for the most part, on your own. 

The reason is that capital gains are subject to tax in their entirety in the year realized. However, capital losses are subject to a $3,000 cap in a given year. For example, if you lose $15,000 in an investment, you can only deduct $3,000 at time. At that, it takes five years to fully write off your loss. 

This is true unless you have both capital gains and capital losses in the same year. In that case, you offset your gains against your losses, plus you can take an extra $3,000 of loss. Suppose you have $10,000 of capital gains and $12,000 of losses. The first $10,000 of losses are offset against the gains. Then, you get the additional $2,000 of losses as a deduction that can offset other income. 

In order to best utilize this rule, you should consider selling investments that are down in 2017 so that you can offset the loss against any investments that made money during 2017. This allows you to effectively increase the allowable capital loss deduction, thereby recovering your losses much faster than you otherwise would. Talk to your investment advisor about the merits of this strategy in your case. 

5. Consider making equipment purchases.

If you own a small business, now is the time to consider purchasing any equipment you might need. A special tax code section creates an advantage for such investments. 

Code §179 allows you to claim a full deduction for the cost of business tools and equipment placed in service in the year purchased. Ordinarily, such cost must be depreciated over its useful life. For example, if you purchase a copier for $5,000, you would have to depreciate it over three years. In that case, you get a deduction of $1,667 for each of three years. But under §179, you can fully expense up to $510,000 of equipment in 2017. 

Now is the time to take advantage of this deduction, especially if your income was unusually high in 2017. The best way to offset that income for tax purposes but still get the benefit of the money is buy equipment you need for your business. 

6. Fund a Health Savings Account.

One of the best-kept secrets in tax planning is the Health Savings Account. This allows you to set aside money earmarked to pay medical expenses not covered by insurance (other than the insurance policy itself). By placing the money in a specially designated savings account, the contribution to the account is tax deductible, up to certain limits. 

It works much like an IRA or 401(k), except that you don’t have to pay taxes on the money when it’s distributed, provided you use it for medical expenses that are not covered by insurance. You can fund this account right up to December 31, 2017, and get a deduction for the money you put in, even if it’s not used for medical expenses in 2017. What’s more, any amounts left in the account at the end of the year carryover to 2018 and remain in your account, under your control. You don’t lose the money. It’s always available to you. 

7. Fund a retirement account.

An IRA, 401(k) or other retirement account can be funded anytime during 2017, and you get a deduction for the contribution (within limits) in 2017. In fact, for most retirement accounts, you have up to April 15 of the following year to contribute. You can get a deduction for the prior year simply by designating the contribution to apply to the prior year. That means a contribution made in 2018 can still apply to and be deductible in 2017. 

8. Consider restructuring your business.

There are millions of people operating small businesses in the form of sole proprietorships. And while this is probably the best way to start a new business, it may not be the best way to continue an existing business. Various forms of business entities are available, including a small business corporation or partnership. Depending on the nature of your business and non-tax considerations, one or more of the available entities might be a better idea than continuing as a sole proprietorship. January 1 is generally the most convenient time to change the structure of an existing business.

 9. Catch up on your charitable contributions.

If you make it a practice to give generously, make another contribution before December 31. This gives you further opportunity to cut taxable income and help those in need at the same time. 

Note that you must have a contemporaneous acknowledgement from the donee organization for contributions of $250 or more. This applies to one-time contributions, not a total of contributions to a given organization over the year. If you don’t have the proper acknowledgement in hand by the time you file your tax return, the deduction is not allowed, even if you have your canceled check and even you get the statement later. That’s why they call it a “contemporaneous acknowledgement.”

 

How to Get More Help 

 

If you need more help with end-of-the-year tax planning, you must consult one of the professional members of my Tax Freedom Institute. Click Here for a list of the current consulting members.

 

This is  an article taken from November December 2017  issue of "Pilla Talks Taxes."  
Newsletter subscribers can read and download the entire issues by logging in at 
http://taxhelponline.com/subscriber-login.html

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

An email address is needed to recieve this newsletter.  MORE INFO

10 issues per year. $99.00 per yr Order Now!

ARTICLES FOUND IN THIS

PILLA TALKS TAXES ISSUE:

 

TAX REFORM UPDATE
       Senate Passes the Tax Bill 

 

END OF YEAR TAX PLANNING
       9 Simple Steps That Can Cut Taxes and Pain

 

THE HOME OFFICE DEDUCTION
      Understanding the Basic Rules
-by MacKenzie C. Hesselroth,EA 

  

 

 

 

Missed a prior featured article?

Here are links to some of the favorites:

FIVE THINGS EVERY CITIZEN
NEEDS TO KNOW ABOUT IRS CONTACTS

 

LEVY OF SOCIAL SECURITY BENEFITS

 

HOW LONG DO I KEEP TAX RECORDS?

 

CHANGE IN POLICY ON
ENFORCEMENT OF STRUCTURING LAW

Laws Pertaining to Moving Your Money
from Account to Account

 

WHAT EVERY CITIZEN NEEDS TO KNOW 
ABOUT RETIREMENT FUND DISTRIBUTIONS

The Tax Consequences of Taking Your 401(k) or IRA  

 

"I'M FROM THE IRS... -And You're Going to Jail!"

 

PASSPORTS AND THE IRS
  They Have More in Common Than You Might Think

 

AVOIDING PENALTIES UNDER OBAMACARE

 



MASTER INDEX OF PILLA TALKS TAXES

RESEARCH REPORTS, ARTICLES

Looking for a specific issue or article? 
Single Issues available for download, $15.95 per issue.

Contact us to order. 1-800-553-6458

 

 

 

PILLA TALKS TAXES - Featured Article
_________________________________________ 

MORE ANALYSIS OF THE TAX CUTS AND JOBS ACT

Impact of the Law in 8 Family Scenarios 

 

A number of public policy research institutes have opined on how the Tax Cuts and Jobs Act will impact Americans. One side continues to insist that the law is nothing more than “tax cuts for the rich.” This is non-sense considering that the law creates cuts that cover just about the entire gamut of income brackets.  

The law rewrites dozens of code sections, eliminates certain deductions, and changes the rates. There is a new deduction for small business owners and the corporate tax rate was slashed from 35% to 21%. According to the Tax Policy Center, the majority of Americans will get a tax cut in 2018 and beyond. See: http://www.taxpolicycenter.org/publications/distributional-analysis-conference-agreement-tax-cuts-and-jobs-act.

In fact, at least four out of five taxpayers will see their taxes cut under the Jobs Act. As I have reported in the past based on analysis by the Tax Foundation, the average taxpayer will likely see their after-tax income rise by about 2.2%. Already the IRS adjusted the W-4 withholding charts for employers to account for the law changes. Because of that, people are now getting more in their paychecks every month due to the reduced tax burden. 

According to the Tax Policy Center’s numbers, citizens earning between $48,600 to $86,100 annually will see their net income grow by about 1.6%. Those earning from $307,900 to $732,800 will see an increase of about 4.1%. Does that constitute “tax cuts for the rich?” The fact is higher income taxpayers pay the overwhelming bulk of taxes to begin with. They are naturally going to see a greater percentage reduction in their liabilities when there’s a cut.  

Exactly how all the changes will affect you depends on where you live, your family size and what you do for a living. According to analyses done by BNA, those in high tax states with substantial itemized deductions may see a tax increase because of the reduction or elimination of certain deductions. But if you earn income from self-employment, you can expect a substantial cut because of the 20% deduction that applies to self-employed people.

For more on this, see my April - May 2018 Issue of Pilla Talks Taxes The 20% Deduction for Small Businesses.

 

BNA produced eight different scenarios to illustrate how the Jobs Act might affect certain people. The scenarios examine 2018 wage and self-employment business income. The examples do not address less common scenarios or the extent to which corporate shareholders will be affected because of the reduced taxes on corporate earnings.   

 

 

Eight Hypothetical Scenarios*  

 

1. Multimillionaires in New York 

 Manhattan residents, a married couple, have adjusted gross income of $2 million. They have a jumbo mortgage (at 4% interest) and take a $40,000 deduction on mortgage interest. They pay property taxes of $96,250 and state income taxes of $135,360. They make annual charitable contributions totaling $100,000. 

They will pay a bit more because they lose itemized deductions, most notably due to the cap of $10,000 in state and local taxes, plus the reduction of available interest for loans capped at $750,000. (The cap under prior law was $1 million.) Some of the loss is offset by the drop in the top marginal tax rate from 39.6% to 37%.   

The effective tax rate for these people goes up slightly, from about 30.51% to 31.19%.

  

2. A Second Home in California  

A married couple has AGI of $1 million. They have a primary residence in Malibu and a second home in Lake Tahoe. The property taxes on the Malibu home are $15,860, and $4,896 on the Lake Tahoe home. They deduct a total of $40,000 in mortgage interest for the two homes and they give $50,000 to charity.  

While they lose almost $86,000 in deductions, the drop in the top tax rate means their effective tax rate goes up from 26.77% to 27.24%, only a slight increase. 

 

3. The Small Business Owners in Pittsburgh  

This married couple has a small manufacturing business in Pittsburgh. Their AGI is $300,000, all from their business. They have two children under age 17. Their deductible mortgage interest is $6,000; their property taxes are $8,600; and they give 5% of their income to charity.  

They will get a big benefit from the 20% deduction for business owners who pay business income taxes on their individual tax returns. That deduction will be worth $60,000. It will cut their AGI considerably, reducing their effective tax rate from 18.69% to 11.58%.  

 

4. The Family in Suburban New York  

A married couple in a New York suburb has two children under age 17. They earn $275,000 and pay state income taxes of $17,290. Their mortgage interest deduction is $14,000, and they pay property taxes of $13,750. They give about the same amount to charity.  

While they will lose some of their deductions and exemptions, they will benefit from the increased child tax credits. Moreover, because the law increased the income point at which the alternative minimum tax kicks in, they will avoid AMT of $5,000. Their effective tax rate goes from 17.45% to 15%. 

 

5. Single in Manhattan  

This single New York resident has no children and rents an apartment. He pays state income taxes of $8,148 and gives about $6,500 to charity.  

This citizen comes out ahead because the deduction for state and local income taxes, up to $10,000, means he doesn’t lose any of it. Plus, he gets his deduction for charitable contributions. His effective tax rate drops from 18.57% to 16.90%.  

 

6. Married in Austin  

This couple rents their home and has no children. Their AGI is $100,000. They give $5,000 a year to charity.   

The law eliminates the personal exemptions, which are $4,050 for each of the two taxpayers. However, that loss is offset by rate cuts and a near-doubling of the standard deduction, from $12,700 to $24,000 for married couples. Their effective tax rate goes from 11.28% to 8.74%.  

 

7. Median Income in Oregon  

This Portland couple has $58,000 of AGI, which is about the median household income for the U.S. They own their home, pay property taxes of $1,688 and mortgage interest of $3,000. Their state income taxes are about $4,744.  

Like the couple in Austin, they lose their itemized deductions but benefit from both the higher standard deduction and the reduced tax brackets. They will see a reduction in their effective tax rate, going from 8.01% to 6.38%. 

 

8. Renting in Milwaukee  

This married couple has $40,000 of AGI with one child under age 17. They rent and have state income taxes of $2,104.  

This family ends up with a negative income tax rate. They benefit from the doubling of the standard deduction and enhanced child tax credits, which are refundable. That means that, subject to limits, low-income taxpayers are able to get more back in refunds than they paid in the first place. Their effective tax rate goes from 1.29% to -1.00%, thus leading to the refund.  

 

  * The above hypothetical scenarios were provided by BNA is its Tax Management Weekly Tax Report, December 25, 2017.  

 

All That is Wrong with the Tax Code   

These scenarios clearly point out all that is wrong with the tax code. The rate of tax that a person or family ultimately pays is not solely dependent on their income. Rather, a vast array of social issues come into play, including whether a person is married or not, whether they have children, the age of the children, whether they own a home, and where in the U.S. they live, if they make charitable contributions or not—just name a few.   

These are all factors that work to make the outcome of the tax laws, and the bottom line tax burden for a given taxpayer, a matter that is completely arbitrary. These various factors are not driven by economic considerations and they certainly are not based on Constitutional provisions or theories. Instead, they are driven by the always-moving target of the nebulous concept of “social justice.” And that itself flows from the unsound notion that it’s the government’s responsibility to achieve income equality in the U.S.   

Apart from the fact that just about all of the Jobs Act tax cuts expire after 2025, this is another reason the Jobs Act is not “tax reform.” The law hasn’t reformed anything in the truest sense of the word. It just stirred the pot on what is deductible, and in what amounts, based on arbitrary ceilings (or floors), and for how long.   

Until individual members of Congress wrap their heads around the idea that the legitimate taxing power of the U.S. Government does not involve the use of force to achieve equality of outcome on the income racetrack, we will never have true tax reform. In a free society, there will always be those who achieve at a higher level than others for a host of reasons the government cannot scrub out of existence.   

Thus, so-called equality is achieved only through overwhelming force, and even at that, such equality is measured by the lowest common denominator, not the highest. Such is the model of socialist and totalitarian governments around the world. It has no place in a constitutional republic. 

 
This is  an article taken from March 2018  issue of "Pilla Talks Taxes."'
Newsletter subscribers can read and download the entire issue by logging in at 
http://taxhelponline.com/subscriber-login.html

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

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ARTICLES FOUND IN THE MARCH

PILLA TALKS TAXES ISSUE:

 

MORE ANALYSIS OF THE TAX CUTS AND JOBS ACT
Impact of the Law in 8 Family Scenarios 

 

REVOCATION OF PASSPORTS
IRS Issues Important Guidance on the Process 

 

IRS TO SHUT DOWN OFFSHORE
VOLUNTARY DISCLOSURE PROGRAM

This is Your Last, Last Chance to Come Forward

 

 

 

 

Missed a prior featured article?

Here are links to some of the favorites:

FIVE THINGS EVERY CITIZEN
NEEDS TO KNOW ABOUT IRS CONTACTS

 

LEVY OF SOCIAL SECURITY BENEFITS

 

HOW LONG DO I KEEP TAX RECORDS?

 

CHANGE IN POLICY ON
ENFORCEMENT OF STRUCTURING LAW

Laws Pertaining to Moving Your Money
from Account to Account

 

WHAT EVERY CITIZEN NEEDS TO KNOW 
ABOUT RETIREMENT FUND DISTRIBUTIONS

The Tax Consequences of Taking Your 401(k) or IRA  

 

"I'M FROM THE IRS... -And You're Going to Jail!"

 

PASSPORTS AND THE IRS
  They Have More in Common Than You Might Think

 

END OF THE YEAR TAX PLANNING
  9 Simple Steps That Can Cut Taxes and Pain

 

AVOIDING PENALTIES UNDER OBAMACARE

 



MASTER INDEX OF PILLA TALKS TAXES

RESEARCH REPORTS, ARTICLES

Looking for a specific issue or article? 
Single Issues available for download, $15.95 per issue.

Contact us to order. 1-800-553-6458

 

 

 

PILLA TALKS TAXES - Featured Article
_________________________________________ 

TRAVEL, MEAL AND ENTERTAINMENT EXPENSES

How to Maximize Travel Expenses

Business travel has been a fact of life since dawn of civilization. Just as an example, for centuries, caravans brought silk, spices and trade goods from Asia across the Silk Road to the Middle East, where they eventually found their way to Italy. In turn, Italian mariners based chiefly in Genoa brought those goods to the world. While the business travel of the typical small business owner is not quite as exotic as traveling the Silk Road, it is just as necessary to the life of that business. 

Though your business travel might not be exotic, the IRS’s requirement to make and keep records is. That’s why so many business owners lose the benefit of their travel expenses when they are audited. But if you understand the rules, you’ll ensure that your legitimate business expenses are allowed as deductions. And by carefully planning your trips, you can get a legitimate business deduction for just about all your travel expenses. The key is to know in advance how to prove your case. 

The Rule for Deducting Business Travel 

Let’s carefully examine the rules for deducting business travel. 

There must be a business purpose for the trip. Code section 162(a)(2) allows a deduction for “traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business.” The first rule is that your expenses must be related to the conduct of your business. You have to prove a direct link between the travel in question and the successful operation of your business. 

How do you accomplish this? Code section 274(a)(1)(A) provides guidance. This statute provides for a deduction when the trip was directly related to the “active conduct” of your trade or business. Travel to meet with existing or prospective customers, clients or patients is directly related to the active conduct of your business when your personal contact with these people is necessary to the success of your business. An example is traveling to a city to meet with a customer or supplier in his office expressly for the purpose of conducting existing business or attempting to establish new business that will have a positive economic impact on your operations. 

Section 274(d) adds an important substantiation requirement that must be observed. To meet the “active conduct” burden of proof, you have to establish through adequate records or by other evidence corroborating your own statement, the following items: 

·  The amount of each expense,

·  The time and place of the travel,

·   The business purpose of the expense, and

·   The business relationship to you of persons you met with during your travel. 

A log of your business travel should include all of these items. In describing the business relationship of the persons you met with, a simple statement showing the nature of your relationship and the purpose of your meeting is sufficient. For example, if you met with Mr. Jones of the ABC Company, who is a re-seller of the products you manufacture (or sell), a statement indicating that he is a prospective (or current) buyer of your products, meets this requirement. See chapter (TBA when book is out) for recordkeeping details and a sample log is included in the appendix to this manual. 

Your expenses cannot be lavish or extravagant. Whether a given expense is excessive is determined on a case-by-case basis. The IRS must look to the nature of your business, the type of clientele you deal with and the expectations of the market you’re in to determine this issue. What is lavish for one person may not be for another. 

For example, a high-end jewelry wholesaler may arrange meetings with retailers at posh hotels, may serve elaborate lunches or dinners to his prospects, and may incur high costs for security at his functions. Given the high cost of his products, this would not be considered lavish or extravagant. On the other hand, a clothing salesman who meets with prospective customers in their own stores could not likely justify the cost of a posh hotel setting. 

The expenses must be “reasonable and necessary” to the conduct of your business and the expenses must be “directly attributable” to your business. Treas. Reg. §1.162-2(a). 

Here you must show a direct link between the expense incurred and the conduct of your business. This includes travel expenses to and from the city in question, overnight lodging expenses, meals, entertainment expenses (discussed below) directly related to your business, and other costs incurred in carrying out your activities on the road. 

Treasury Regulation section 1.274-2(c)(3) lists four requirements that you must to show to make this connection. An expense is directly related to, or associated with, the active conduct of your business if: 

·        You had more than a general expectation of deriving income or some other specific trade or business benefit. Your expectations of business activity from the travel must be specific and tangible, not merely related to “good will” or other “blue sky” expectations. 

·        You actively engaged in a business meeting, negotiation, discussion, or other bona fide business transaction, other than entertainment, for the purpose of obtaining income or some other specific business benefit. Merely hobnobbing with potential customers is not sufficient to meet this rule. You must have met with existing or prospective business associates in a business environment. This does not mean that you must have actually made a deal with prospective customers. 

·        In light of all the facts and circumstances of the case, the principle character of the meeting was the active conduct of your trade or business. It is not necessary that more time be devoted to business than to entertainment to meet this requirement. It is only necessary to prove that the overarching theme of the meeting was to carry out business. For example, suppose you travel to Los Angeles to meet with three customers who portend substantial sales for your business. You meet in a local hotel conference room for two hours, discuss your business affairs, then take the customers to a baseball game and dinner, where you spend a combined five hours. The fact that the meeting only lasted two hours does not change the character of the business meeting. The costs are deductible. 

·        The expenditures were for you and persons with whom you engaged in the active conduct of your trade or business. Expenditures attributable to a person not related to your business are not deductible. 

Business and personal travel may be mixed. Treasury Regulation section 1.162-2(b)(1) makes it clear that where personal and business travel are mixed, travel expenses may nevertheless be deducted “if the trip is related primarily” to your trade or business. Suppose you travel to New York City for the primary purpose of meeting with prospective clients. While there, you meet with college friends, go to dinner and a Broadway show. 

The fact that you engaged in personal activities while in New York does not change the character of the travel as being primarily for business. However, because the meeting with friends was purely personal in nature, you get no deduction for expenses attributable to that dinner and the show. Still, your travel expenses, hotel, cab fares, etc., are fully deductible since the primary purpose of the trip was business in nature. 

Even if your trip is not primarily business-related, expenses that “are properly allocable” to your trade or business are still deducted. Suppose you’re on the same trip to New York. But instead of a business purpose, you take the family there for a family reunion. While in New York, you set aside one day to meet with prospective clients. All costs incurred in connection with that activity, such as cab fares, meals or entertainment with the clients, are deductible. This is true even though your travel expenses to and from New York and your hotel costs are not.   

 

 

This is a portion of an article taken from September 2017  issue of "Pilla Talks Taxes."  
Newsletter subscribers can read and download the entire article by logging in at 
http://taxhelponline.com/subscriber-login.html

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

An email address is needed to recieve this newsletter.  MORE INFO

10 issues per year. $99.00 per yr Order Now!

ARTICLES FOUND IN THE LATEST 

PILLA TALKS TAXES ISSUE:

 

TRAVEL, MEAL AND ENTERTAINMENT EXPENSES
      How to Maximize Travel Expenses

FILING A TIMELY CDP LIEN APPEAL
      Pay Attention to the Filing Address on Letter 3172

ID THEFT MARCHES ON
      Another Reason the IRS Can’t Stop the Crimes 

EQUIFAX DATA BREACH AFFECTS MILLIONS OF AMERICANS
      Here’s What You Can Do Now

 

 

 

Missed a prior featured article?

Here are links to some of the favorites:

FIVE THINGS EVERY CITIZEN
NEEDS TO KNOW ABOUT IRS CONTACTS

 

LEVY OF SOCIAL SECURITY BENEFITS

 

HOW LONG DO I KEEP TAX RECORDS?

 

CHANGE IN POLICY ON
ENFORCEMENT OF STRUCTURING LAW

Laws Pertaining to Moving Your Money
from Account to Account

 

WHAT EVERY CITIZEN NEEDS TO KNOW 
ABOUT RETIREMENT FUND DISTRIBUTIONS

The Tax Consequences of Taking Your 401(k) or IRA  

 

"I'M FROM THE IRS... -And You're Going to Jail!"

 

PASSPORTS AND THE IRS
  They Have More in Common Than You Might Think

 

AVOIDING PENALTIES UNDER OBAMACARE

 



MASTER INDEX OF PILLA TALKS TAXES

RESEARCH REPORTS, ARTICLES

Looking for a specific issue or article? 
Single Issues available for download, $15.95 per issue.

Contact us to order. 1-800-553-6458

 

 

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