TCJA Allows Bonus Depreciation on Purchase of Leased Vehicle

Before the Tax Cuts and Jobs Act (TCJA), your purchase of the vehicle you were leasing did not qualify for either Section 179 expensing or bonus depreciation. But times have changed.

The TCJA made two changes that mean 100 percent bonus depreciation is available on the vehicle you lease and then purchase, regardless of whether you purchase it during the lease term or at the end of the lease. The two technical reasons you can do this are as follows:

1.      During the lease, you had no depreciable interest.

2.      Bonus depreciation is now available on used property.

Technically, the two changes work like this:

·         While you were leasing the vehicle, you had no depreciable interest in the vehicle. The lessor depreciated the vehicle. You, the lessee, paid rent.

·         Your purchase of the vehicle that you were leasing is the purchase of a vehicle that you had NOT used under the bonus depreciation law, because you did not have a depreciable interest in it at any time.

Example. You pay $32,000 for a pickup truck that you have been leasing for business purposes. The pickup truck has a gross vehicle weight rating of 6,531 pounds, and your mileage log proves 90 percent business use. You may use bonus depreciation to deduct the $28,800 business cost of the pickup ($32,000 x 90 percent).

Note the difference: As with prior law, with Section 179 expensing, you get no additional deductions. But with bonus depreciation, you can expense your entire business cost.

Backdoor Roth IRA After TCJA

Good news. The Tax Cuts and Jobs Act (TCJA) did not harm the backdoor Roth strategy.

As you likely know, the Roth IRA is a terrific way to grow your wealth with a minimum tax downside because you pay the taxes up front and then, with the proper holding period, pay no taxes after that.

But if you earn too much, you’re completely barred from contributing to a Roth IRA unless you can use the backdoor Roth technique, which involves making a nondeductible contribution to a traditional IRA and then rolling that money into a Roth.

The backdoor Roth strategy has been around for a good nine years, and it has experienced no trouble that we are aware of, so we think it’s a good strategy. We also like the recent notations in the legislative history and the comments from the IRS spokesperson that show approval of the strategy.

Keep in mind that with some planning, you can avoid any taxes on the rollover. For example, if you have an existing traditional IRA, you can move those monies to your qualified plan to avoid having the backdoor strategy trigger some taxes. And if you have no traditional IRA, the nondeductible contribution to the traditional IRA and the subsequent rollover to the Roth IRA triggers no taxes.

Selling Your Home

Here are some things that homeowners should think about when selling a home:

Gains
Taxpayers who sell their main home and have a gain from the sale may be able to exclude up to $250,000 of that gain from their income. Taxpayers who file a joint return with their spouse may be able to exclude up to $500,000. 
Homeowners excluding all the gain do not need to report the sale on their tax return.
Ownership and use
To claim the exclusion, the taxpayer must meet ownership and use tests. During a five-year period ending on the date of the sale, the homeowner must have owned the home and lived in it as their main home for at least two years.
Losses
Some taxpayers experience a loss when their main home sells for less than what they paid for it. This loss is not deductible.
Multiple homes
Taxpayers who own more than one home can only exclude the gain on the sale of their main home. They must pay taxes on the gain from selling any other home.
Reported sale
Taxpayers who don’t qualify to exclude all of the taxable gain from their income must report the gain from the sale of their home when they file their tax return. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return.  Taxpayers who receive Form 1099-S must report the sale on their tax return even if they have no taxable gain.
Mortgage debt
Generally, taxpayers must report forgiven or canceled debt as income on their tax return. This includes people who had a mortgage workout, foreclosure, or other canceled mortgage debt on their home. Taxpayers who had debt discharged after Dec. 31, 2017, can’t exclude it from income as qualified principal residence indebtedness unless a written agreement for the debt forgiveness was in place before January 1, 2018.
Possible exceptions
There are exceptions to these rules for some individuals, including persons with a disability, certain members of the military, intelligence community and Peace Corps workers.

IRS Video Tip - Meals & Entertainment

Here is a link to an IRS video for their tax tips regarding meals & entertainment.

Click here for Video in English
Click here for Video in Spanish

Earned Income Tax Credit

All individual taxpayers and families should claim tax credits for which they are eligible. Tax credits can not only reduce the amount of taxes owed, but some can result in a tax refund. The earned income tax credit (EITC) is such a credit. 

Based on income, family size and filing status, the maximum amount of EITC for Tax Year 2018 is:

•             $6,431 with three or more qualifying children

•             $5,716 with two qualifying children

•             $3,461 with one qualifying child

•             $519 with no qualifying children

Every year, millions of taxpayers don’t claim the EITC because they don’t know they’re eligible.

For more information about the EITC visit IRS.gov/eitc

Itemized VS Standard Deductions

Tax law changes in the Tax Cuts and Jobs Act affect almost everyone who itemized deductions on tax returns they filed in previous years.  One of these changes is that TCJA nearly doubled the standard deduction for most taxpayers. This means that many individuals may find it more beneficial to take the standard deduction. However, taxpayers may still consider itemizing if their total deductions exceed the standard deduction amounts.

Here are some highlights taxpayers need to know if they plan to itemize deductions:

Medical and dental expenses
Taxpayers can deduct the part of their medical and dental expenses that’s more than 7.5 percent of their adjusted gross income.

State and local taxes
The law limits the deduction of state and local income, sales, and property taxes to a combined, total deduction of $10,000. The amount is $5,000 for married taxpayers filing separate returns. Taxpayers cannot deduct any state and local taxes paid above this amount.

Miscellaneous deductions
The new law suspends the deduction for job-related expenses or other miscellaneous itemized deductions that exceed 2 percent of adjusted gross income. This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel.

Home equity loan interest
Taxpayers can no longer deduct interest paid on most home equity loans unless they used the loan proceeds to buy, build or substantially improve their main home or second home.

Taxpayer Bill of Rights

Every taxpayer has rights when dealing with the IRS. The Taxpayer Bill of Rights takes these rights from the tax code and groups them into 10 categories.

The Right to Be Informed
Taxpayers have the right to know how to comply with tax laws. They are entitled to clear explanations of the laws and IRS procedures. Taxpayers have the right to know about IRS decisions affecting their accounts with clear explanations of the outcomes.

The Right to Quality Service
Taxpayers have the right to receive prompt, courteous and professional assistance when dealing with the IRS. They also have the right to speak with a supervisor about inadequate service. Communications from the IRS should be clear and easy to understand.

The Right to Pay No More Than the Correct Amount of Tax
Taxpayers must pay only the amount of tax legally due. This includes interest and penalties. The IRS must apply all tax payments properly.

The Right to Challenge the IRS’s Position and Be Heard
Taxpayers have the right to object to formal IRS actions or proposed actions. They can also provide justification with additional documentation. Taxpayers can expect the IRS to consider timely objections and documentation promptly and fairly. Taxpayers can expect a response when the IRS disagrees with the taxpayer’s position.

The Right to Appeal an IRS Decision in an Independent Forum
Taxpayers are entitled to a fair and impartial appeal of most IRS decisions. This includes appealing certain penalties. Taxpayers have the right to receive a written response from the IRS regarding a decision. Taxpayers generally have the right to take their case to court.

The Right to Finality

Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.

The Right to Privacy

Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.

The Right to Confidentiality

Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.

The Right to Retain Representation

Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.

The Right to a Fair and Just Tax System

Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.