This tax update may give you reasons to amend your tax returns regarding the tax extenders, SALT workarounds, domicile audits and empowerment zones. Let me know if you need help.
Many tax returns were prepared assuming that Congress would pass a law for the “tax extenders” as it has in past years. However, the bill extending deductions and credits for 2018 and 2019 has not passed. Other matters have the attention of Congress.
The tax extenders include 26 tax breaks that expired at the end of 2017 and 2018. Some are for businesses, such as motor speedway depreciation, biodiesel credits, and disaster relief. Others are for individuals, such as retaining the 7.5% threshold instead of 10% for medical expenses, the private mortgage insurance (PMI) deduction, exclusion of up to $2 million from income from mortgage debt forgiveness on your home, and an above-the-line deduction college tuition and qualified expenses.
If you filed your 2018 returns relying on passage, and the extender bill does not pass, you could face an inquiry form the IRS. If you filed without relying on the extenders, and the bill does pass, you may be able to amend your 2018 filing to obtain a refund.
SALT and work around attempts by states
As you know from the first post in our series on the Tax Cut and Job Act (“TCJA”), the new tax law places a $10,000 cap on state and local taxes, or “SALT.” This includes state and city income taxes, property taxes, sales taxes and excise taxes.
Some states, including New York and New Jersey, felt that TCJA targeted them and responded with workarounds. One such measure provides that certain payments of state income taxes would be treated as charitable contributions, so that the full amount would be allowed as part of your Schedule A deductions.
The IRS reacted by indicating that only the IRS determines what are allowable Schedule A deductions and this workaround was not one of them. As Christy Rakoczy Bieber wrote recently on creditkarma.com:
If you’re counting on a SALT cap workaround from your state to keep your federal taxes low, you may face an unpleasant surprise at tax time since the IRS has made clear it won’t allow you to take deductions for charitable donations if you received tax credits.
Trying to avoid the state taxes
Some people with homes in more than one state have taken another approach to SALT limits by claiming to be residents of the state imposing less income taxes. For example, if you have homes in Massachusetts and in Florida, you would clearly pick Florida because there is no state income tax.
If you do pick a no or low-income tax state, be careful. The state that is missing out on tax revenue may conduct a domicile audit. Having the documentation to prove your residency is key. While residency is based on your “state of mind,” an audit would focus on a list of facts, including where you spend more time, the state in which you have a driver’s license and vote, where you receive your mail, and where you worship. Be sure to take the necessary steps and retain proof.
Empowerment Zone rollovers and Qualified Small Business Stock Sales (QSBS)
There are provisions for favorable treatment of certain capital gains transactions. Here are two:
- If you purchased stock in a qualified small business, you may be able to exclude gain on the sale. The exclusion is even higher for certain empowerment zones, and;
- You can roll over gain from certain sales into investments in an empowerment zone, delaying or even reducing the tax on the gain. There are opportunity funds into which you can invest for this deferral. If you think you need to amend, or if you have any questions on this post or any other matter, let me know. I am here to help.
If you think you need to amend, or if you have any questions on this post or any other matter, let me know. I am here to help.