Fox Accounting & Tax Services Inc.                                    (503)246-6994   Income Tax Preparation, Payroll & Bookkeeping Services

The House Ways and Means Committee has proposed sweeping changes to the tax rules. The proposal would drop corporate rates from the current top rate of 35% to a top rate of 20%.  It also collapses the individual rates to 4 brackets ranging from 12% to 39.6%.    This is being touted as a middle class tax cut but is it?

How it affects individuals and families will depend a lot on where they live and how reliant they are on specific deductions. The deductions for state and local taxes and medical costs are on the chopping block.  Mortgage interest deductions would be limited and no deduction would be allowed for second homes.  Standard deductions double for most taxpayers, but they repeal the personal exemptions.  This would be a positive change for taxpayers who do not itemize but likely not for those who do.  The higher standard deduction minus is unlikely to make up for the lost exemptions and itemized deductions for many, if not most, folks who currently itemize.  The proposal would increase the child credit to $1,600 per child and extend the credit to those earning $230,000.   This could mitigate the loss of the exemption deductions for dependents but not those claimed by the taxpayer and spouse. 

The only way to know for certain how this bill would impact you would be to re-work your tax return under the new proposed laws.  My sense is that it will be a middle class tax cut for some and an increase for many.  Again, this is just a proposal at this point.  The final tax bill is likely to have many changes.  In its current form, it is estimated that the bill would increase the national debt by 1.4 trillion dollars.  

One item to note when doing your tax planning is the proposed change to the sale of principal residence rules.  Under the current law, you can exclude gain on the sale of your principal residence up to $250,000 for singles or $500,000 for married joint.  Currently, you need to have resided in the home for 2 of the past 5 years.  The new proposal would change that to 5 out of the last 8 years.  This rule would take effect for sales after 12/31/17.  This could negatively impact taxpayers whose houses are currently on the market if they have not met the new residency rules.  See item 7 below.

​For those of you with stock options, take a look at item 11 under business proposals.  The incentive to exercise and hold stock options may be on its way out.

​The standared mileage rate for business has been reduced from 54¢ to 53.5¢ for tax year 2017. The rates for charity and medical deductions are 14¢ and 17¢ respectively.

For those claiming actual expenses rather than using the standard mileage rate, the Annual depreciation and expensing deductions for so-called luxury autos are limited to specific dollar amounts. These amounts are inflation-adjusted each year. The IRS has announced that for autos (not trucks or vans) first placed in service during 2017, the dollar limit for the first year an auto is in service is $3,160 ($11,160 if the bonus first-year depreciation allowance applies); for the second tax year, $5,100; for the third tax year, $3,050; and for each succeeding year, $1,875. These dollar limits are the same as those that applied for autos first placed in service in 2016.

For light trucks or vans (passenger autos built on a truck chassis, including minivan and sport-utility vehicles (SUVs) built on a truck chassis) first placed in service during 2017, the dollar limit for the first year the vehicle is in service is $3,560 ($11,560 if the bonus first-year depreciation allowance applies); for the second tax year, $5,700; for the third tax year, $3,450; and for each succeeding year, $2,075. For a light truck or van placed in service in 2017, the dollar figures are the same as for such vehicles first placed in service in 2016, except that the third-year amount is $100 higher.
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A taxpayer that leases a business auto may deduct the part of the lease payment representing its business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that auto lessees can't avoid the effect of the luxury auto limits, however, taxpayers must include a certain amount in income during each year of the lease to partially offset the lease deduction. The amount varies with the initial fair market value of the leased auto and the year of the lease, and is adjusted for inflation each year. The IRS has released a new inclusion amount table for autos first leased during 2017.

The IRS recently issued IRS Health Care Tax Tip # 2016-49, May 5, 2016:

While you may be tempted to forget all about your taxes and your premium tax credit once you've filed your tax return, don’t give in to that temptation.

When you applied for assistance to help pay the premiums for 2016 health coverage through the Marketplace, the Marketplace estimated the amount of your premium tax credit. Advance payments are based on an estimate of the premium tax credit that you will claim on your federal income tax return. You may be receiving the benefit of monthly advance payments to lower what you pay out-of-pocket for your monthly premiums.  Doing a  Premium Tax Credit (PTC) check-up now will help you avoid large differences between the advance credit payments made on your behalf and the amount of the premium tax credit you are allowed when you file your tax return next year.  

The IRS will either subtract the difference from your refund or add it to your taxes owed. If you ended up owing money due to excess advance payments, you should consider adjusting the amount of those payments now to avoid any issues, like a large tax bill, when you file your 2016 tax return next year. Similarly, if you got a refund that was larger than you expected, you could increase the amount of the advance payments of the credit sent to your provider on your behalf, which will lower what you pay out-of-pocket for your monthly premiums.

The Premium Tax Credit Change Estimator can help you estimate how your premium tax credit will change if your income or family size changes during the year. This estimator tool does not report changes in circumstances to your Marketplace. To report changes and to adjust the amount of your advance payments of the premium tax credit you must contact your Health Insurance Marketplace.
For more information, see the Claiming the Credit and Reconciling Advance Credit Payments page on IRS.gov/aca.

As of Jan. 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

• 54 cents per mile for business miles driven.
• 19 cents per mile driven for medical or moving purposes.
• 14 cents per mile driven in service of charitable organizations.

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​Inflation in 2015 was too tame to trigger the cost-of-living adjustments that nudge pension plan limitations upward. Here are some figures to help plan 2016.

Employees May Contribute up to $18,000 to their 401(k) plans in 2016

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan remains unchanged at $18,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.

Employees May Contribute up to $12,500 to their SIMPLE retirement account

SIMPLE account contribution limits for 2016 are unchanged at $12,500. The additional "catch-up" contribution for people age 50 and over  also remains unchanged at $3,000. The largest total SIMPLE contribution possible in 2016 is $15,500.

SEP (Simplified Employee Pension) plans are still limited to 25% of compensation (or self-employment earnings). 

The maximum amount small business owners and the self-employed may contribute to a SEP or other defined contribution plan remains $53,000 in 2016.

Annual IRA contribution limits remain unchanged at $5,500 ($6,500 for individuals 50 or above) 

Individuals who have earned income may make deductible contributions to a traditional IRA up to $5,500 or that year's compensation from wages or self-employment, whichever number is lower. The contribution limit is $6,500 for taxpayers age 50 or above. You can make deductible contributions to your IRA up to April 18, 2026 this year's tax filing deadline.

The deduction for taxpayers contributing to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000. These thresholds are unchanged from 2015. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range remains unchanged at $98,000 to $118,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Individuals who exceed these phase out thresholds may still contribute to their IRA but will be unable to deduct the contributions.

Roth IRA income limits increase slightly in 2016

Like traditional IRAs, Roth IRA contributions are limited to $5,500/$6,500. Contributors must have earned income at least equal to their contribution amount. But Roth contributions are not deductible and Roth distributions are not taxed.

Roth IRAs also have an income test for eligibility, unlike traditional IRAs. Individuals with adjusted gross income above certain levels may not contribute to a Roth. The AGI phase-out range for taxpayers making contributions to a Roth IRA in 2016 is $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000 in 2015. For singles and heads of household, the income phase-out range is $117,000 to $132,000, up from $116,000 to $131,000. 

Taxpayers in these ranges will have their maximum Roth contribution amounts "phased out" with the amount at the lower end close to the max and the amount at the upper end near zero. 

Health savings accounts, or HSA's, are individual bank accounts owned by employees or self employed individuals that allow for tax free payment or reimbursement of eligible medical expenses. 

HSA Highlights/Advantages:

• Tax Deductible Contributions
  
• Tax Free Growth on Account
  
• Tax Free Distributions for Qualified Medical Expenses
  
• Can be used as a Traditional IRA after age 65 (or Medicare Eligibility)
  

HSA's In general:
These accounts work in a manner which is very similar to an IRA account but they are for out of pocket medical expenses.  Qualifying individuals can deposit funds to the account, take a tax deduction for the funds deposited, and then withdrawal the funds tax free to pay qualified medical expenses.  You might be thinking, "wouldn't it be easier just to deduct your medial expenses instead?"  Well, yes it would but that isn't they way congress has written the laws.  As things stand now you can only deduct medical expenses that exceed 10% of your income.  For most people that means that they can't deduct any medical expenses at all. Health Savings Accounts are a good way to convert these otherwise non deductible medical expenses into deductible ones.

The Rules:
No permission or authorization from the IRS is necessary to establish an HSA. You set up an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.

For tax year 2016 an individual with self-only coverage can contribute and deduct up to $3,350.  A contribution and deduction of up to $6,750 is allowed for a family coverage plan.

What's the catch?  Well, there are a couple of them.  First, to have a tax advantaged Health Savings Account you need to have a qualifying high deductible health insurance plan.  The plan must have a deductible of no less than $1,300 for self-only or $$2,600 for family coverage. Additionally, the plan must meet the maximum out of pocket rules.  The most that a plan participant can be required to pay our of pocket cannot exceed $6,550 for self coverage or $13,100 for family coverage.  Typically, qualifying high deductible plans have lower monthly premiums but higher out of pocket costs associated with them.  The Health Savings Component is mean to help you cover those higher out of pocket costs.  

To receive tax free distributions, the proceeds must be used for qualified medical expenses.  If HSA funds are used to pay for unqualified expenses the distribution will be included in income and will also be subject to a 20% penalty.  After you reach age 65 and become eligible for medicare you can take distributions from the account for non medical purposes without incurring the 20% penalty; however, the distributions will be subject to tax.  

Retirement Planning - How to Utilize Your HSA in Retirement:
Once you become medicare eligible you are no longer qualified to make contributions to your HSA. But, you can still utilize your Health Savings Account.  In fact, an HSA is a valuable asset in retirement providing useful benefits.  If you are fortunate enough to remain relatively healthy during your working years and don't incur a lot of medical expenses, you could build up a significant balance in your HSA.  You can continue to use this account balance for medical expenses as they occur. Your distributions will remain tax free to the extent that you are reimbursing medical expenses. What you don't use for medical expenses can be withdrawn just like regular IRA withdrawals with no penalty.  You will need to pay income tax on the non medical distributions, just as you would with a traditional IRA.

Two individuals who claim their tax information was stolen when hackers breached the Service’s “Get Transcript” web application filed a class action lawsuit against the agency. They say that IRS was generally aware that its computer systems were a target for criminals and failed to implement the necessary security measures or otherwise fix the weaknesses. They allege that IRS made an intentional decision not to strengthen the security of its systems, which led to the loss of taxpayer data in the Get Transcript breach.

The IRS issued a statement last month revealing that their website had been used by a "sophisticated" and well funded group attempting to steal tax forms containing personal identifying and financial information.  The thieves used the popular IRS website tool "Get Transcript" to access this information on roughly 200,000 taxpayers.  They successfully obtained  tax data on just over half.

The Get Transcript tool is an extremely handy way for taxpayers and their accountants to gain access to tax data.  This can come in handy when apply for mortgages or financial aid and is extremely useful when filing or amending returns for prior years.  The IRS has tried to safeguard the system by having the user answer a series of security questions.  The questions are often things like a prior address from a very long time ago that only the taxpayer should know.  Evidently, the security questions were not effective in this case because the crooks already had some identifying information on their target individuals.

The IRS has temporarily disabled the Get Transcript tool.  We will likely have to resort to mailed transcripts until they can shore up their system.  Hopefully, we wont go back to 4 week wait times!

For a more complete account of the situation please read the IRS statement below.

The IRS announced today that criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on approximately 100,000 tax accounts through IRS’ “Get Transcript” application. This data included Social Security information, date of birth and street address. These third parties gained sufficient information from an outside source before trying to access the IRS site, which allowed them to clear a multi-step authentication process, including several personal verification questions that typically are only known by the taxpayer. 

The matter is under review by the Treasury Inspector General for Tax Administration as well as the IRS’ Criminal Investigation unit, and the “Get Transcript” application has been shut down temporarily. The IRS will provide free credit monitoring services for the approximately 100,000 taxpayers whose accounts were accessed. In total, the IRS has identified 200,000 total attempts to access data and will be notifying all of these taxpayers about the incident. As always, the IRS takes the security of taxpayer data extremely seriously, and we are working aggressively to protect affected taxpayers and continue to strengthen our protocols. 

ADDITIONAL INFORMATION -
The IRS announced today it will be notifying taxpayers after third parties gained unauthorized access to information on about 100,000 accounts through the “Get Transcript” online application. 

The IRS determined late last week that unusual activity had taken place on the application, which indicates that unauthorized third parties had access to some accounts on the transcript application. Following an initial review, it appears that access was gained to more than 100,000 accounts through the Get Transcript application. 

In this sophisticated effort, third parties succeeded in clearing a multi-step authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The multi-layer process also requires an additional step, where applicants must correctly answer several personal identity verification questions that typically are only known by the taxpayer. The IRS temporarily shut down the Get Transcript application last week after an initial assessment identified questionable attempts were detected on the system in mid-May. The online application will remain disabled until the IRS makes modifications and further strengthens security for it. 

The matter is under continuing review by the Treasury Inspector General for Tax Administration and IRS offices, including Criminal Investigation. 

The IRS notes this issue does not involve its main computer system that handles tax filing submission; that system remains secure. 

On the Get Transcript application, a further review by the IRS identified that these attempts were quite complex in nature and appear to have started in February and ran through mid-May. In all, about 200,000 attempts were made from questionable email domains, with more than 100,000 of those attempts successfully clearing authentication hurdles. During this filing season, taxpayers successfully and safely downloaded a total of approximately 23 million transcripts. 

In addition, to disabling the Get Transcript application, the IRS has taken a number of immediate steps to protect taxpayers, including: 
1. Sending a letter to all of the approximately 200,000 taxpayers whose accounts had attempted unauthorized accesses, notifying them that third parties appear to have had access to taxpayer Social Security numbers and additional personal financial information from a non-IRS source before attempting to access the IRS transcript application. Although half of this group did not actually have their transcript account accessed because the third parties failed the authentication tests, the IRS is still taking an additional protective step to alert taxpayers. That’s because malicious actors acquired sensitive financial information from a source outside the IRS about these households that led to the attempts to access the transcript application. 
2. Offering free credit monitoring for the approximately 100,000 taxpayers whose Get Transcript accounts were accessed to ensure this information isn’t being used through other financial avenues. Taxpayers will receive specific instructions so they can sign up for the credit monitoring. 

The IRS emphasizes these outreach letters will not request any personal identification information from taxpayers. In addition, the IRS is marking the underlying taxpayer accounts on our core processing system to flag for potential identity theft to protect taxpayers going forward – both right now and in 2016. 

These letters will be mailed out starting later this week and will include additional details for taxpayers about the credit monitoring and other steps. At this time, no action is needed by taxpayers outside these affected groups. 

The IRS is continuing to conduct further reviews on those instances where the transcript application was accessed, including how many of these households filed taxes in 2015. It’s possible that some of these transcript accesses were made with an eye toward using them for identity theft for next year’s tax season. 

The IRS emphasizes this incident involves one application involving transcripts – it does not involve other IRS systems, such as our core taxpayer accounts or other applications, such as Where’s My Refund. 

The IRS will be working aggressively to protect affected taxpayers and strengthen our protocols even further going forward. 

As of Jan. 1, 2015, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

• 57.5 cents per mile for business miles driven.
  
• 23 cents per mile driven for medical or moving purposes.
  
• 14 cents per mile driven in service of charitable organizations.

".. the budget environment of the last five years has brought about a devastating erosion of taxpayer service, harming taxpayers individually and collectively", said the The National Taxpayer Advocate Nina Olson referring to the IRS in the 2014 annual report released this week. Here are some hi-lights:

• The IRS is unlikely to answer even half the telephone calls it receives, and levels of service may average as low as 43%.  
  
• Taxpayers who manage to get through are expected to wait on hold for 30 minutes on average and considerably longer at peak times. I myself have been on hold for over 4 hours in recent weeks.
  
• The IRS will answer far fewer tax-law questions than in past years. During the upcoming filing season, it will not answer any tax-law questions except "basic" ones. After the filing season, it will not answer any tax-law questions at all, leaving the roughly 15 million taxpayers who file later in the year unable to get answers to their questions by calling or visiting IRS offices.
  
• Tax return preparation assistance has been eliminated.
  

In addition to these service declines, the budget cuts will have a negative financial impact as well. IRS Commissioner John Koskinen outlined how the already strapped agency will absorb the latest cut of  $346 Million to their fiscal year 2015 budget.  The consequences include fewer audits and case closures.  Fewer automated collections system and field collection case closures. A continued hiring freeze which should result in the loss of 1800 employees through attrition during 2015. The resulting reduced enforcement staffing means that the agency will lose at least 2 billion in revenue that otherwise would have been collected.