Tax news: August ’18
SALT shaker. The Tax Cuts and Jobs Act (TCJA) limits the annual deduction for state and local taxes (SALT) to $10,000. As a result of this change, residents of high-tax states like California and New York may be contemplating a move to a lower-tax state. For instance, if you forfeit $50,000 in deductions this year and you’re in the top 37% bracket, the TCJA will cost you $18,500. Of course, there are numerous other factors to consider.
Higher learning. A little-noticed provision in the TCJA imposes a 1.4% tax on colleges with at least 500 students and endowment assets of $500,000 or more per full-time student. This new tax is expected to hit about 30 schools, including prestigious universities like Harvard, MIT, Duke and Stanford. But alumni are pushing for a repeal and momentum is gaining in the House for such a measure.
Short-term rentals. Are you planning to get out of town for a week while a big local event takes place? If you rent out your home during the time, you don’t have to pay any tax on the income, as long as you don’t rent the place for more than 14 days during the year. However, you’re not allowed any deductions for rental-related expenses (like cleaning costs). So, this is a good way to pocket some cash, with no tax hit.
Mercy for tax debtors. The IRS continues to draw flak about its private debt collection program. A 2015 highway spending measure authorized the IRS to assign private firms to help collect tax on certain tax debts. The private firms are still required to respect all the usual taxpayer rights and properly identify themselves as contractors responsible for collecting taxes. But this approach has been tried before, with mixed results. Some of the criticism for the current program is that low-income taxpayers are being targeted. Now directives have been issued to lay off tax debtors who have income of less than 250% of the federal poverty level. New legislation introduced in the House modernizing IRS operations seeks to protect such taxpayers.
Respond to the IRS. Have you received a CP2000 notice from the IRS? First thing to do: Don’t panic. The IRS sends out between 4 million and 5 million of these notices a year! The correspondence lets you know that the IRS computers have turned up a discrepancy between the income or deduction reported on your return and information provided by third parties through W-2s, 1099s and other forms. Double-check your records. If you agree you owe the money, simply pay the IRS, as directed. If you disagree, send back a written statement, accompanied by documentation that proves your point. Or you can call the number provided by the IRS to speak to an agent. In any event, don’t dawdle. The deadline is usually 30 days from receipt of the notice.