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In 2018, Some Tax Benefits Increase Slightly Due to Inflation Adjustments, Others Unchanged

WASHINGTON — The IRS announced the tax year 2018 annual inflation adjustments for more than 50 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2017-58 provides details about these annual adjustments. The tax year 2018 adjustments generally are used on tax returns filed in 2019. The tax items for tax year 2018 of greatest interest to most taxpayers include the following dollar amounts:
• The standard deduction for married filing jointly rises to $13,000 for tax year 2018, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,500 in 2018, up from $6,350 in 2017, and for heads of households, the standard deduction will be $9,550 for tax year 2018, up from $9,350 for tax year 2017.
• The personal exemption for tax year 2018 rises to $4,150, an increase of $100. The exemption is subject to a phase-out that begins with adjusted gross incomes of $266,700 ($320,000 for married couples filing jointly). It phases out completely at $389,200 ($442,500 for married couples filing jointly.)
• For tax year 2018, the 39.6 percent tax rate affects single taxpayers whose income exceeds $426,700 ($480,050 for married taxpayers filing jointly), up from $418,400 and $470,700, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds for tax year 2018 are described in the revenue procedure.
• The limitation for itemized deductions to be claimed on tax year 2018 returns of individuals begins with incomes of $266,700 or more ($320,000 for married couples filing jointly).
• The Alternative Minimum Tax exemption amount for tax year 2018 is $55,400 and begins to phase out at $123,100 ($86,200, for married couples filing jointly for whom the exemption begins to phase out at $164,100). The 2017 exemption amount was $54,300 ($84,500 for married couples filing jointly). For tax year 2018, the 28 percent tax rate applies to taxpayers with taxable incomes above $191,500 ($95,750 for married individuals filing separately).
• The tax year 2018 maximum Earned Income Credit amount is $6,444 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,318 for tax year 2017. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
• For tax year 2018, the monthly limitation for the qualified transportation fringe benefit is $260, as is the monthly limitation for qualified parking,
• For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage remains as it was for 2017: $695.
• For tax year 2018, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,300, an increase of $50 from tax year 2017; but not more than $3,450, an increase of $100 from tax year 2017. For self-only coverage, the maximum out-of-pocket expense amount is $4,600, up $100 from 2017. For tax year 2018, participants with family coverage, the floor for the annual deductible is $4,600, up from $4,500 in 2017; however, the deductible cannot be more than $6,850, up $100 from the limit for tax year 2017. For family coverage, the out-of-pocket expense limit is $8,400 for tax year 2018, an increase of $150 from tax year 2017.
• For tax year 2018, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000, up from $112,000 for tax year 2017.
• For tax year 2018, the foreign earned income exclusion is $104,100, up from $102,100 for tax year 2017.
• Estates of decedents who die during 2018 have a basic exclusion amount of $5,600,000, up from a total of $5,490,000 for estates of decedents who died in 2017.
• The annual exclusion for gifts increased to $15,000, an increase of $1,000 from the exclusion for tax year 2017.
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Taxpayers Who are Victims of Domestic Abuse Should Know Their Rights

Domestic abuse often includes control over finances. An important part of managing finances is understanding one’s tax rights. Taxpayers have the right to expect the IRS to consider facts and circumstances that might affect the individual’s taxes.

Taxpayers have the right to:
• File a separate return even if they’re married.
• Review the entire tax return before signing a joint return.
• Review supporting documents for a joint return.
• Refuse to sign a joint return.
• Request more time to file their tax return.
• Get copies of prior year tax returns from the IRS.
• Seek independent legal advice.

Taxpayers also have the right to request relief from the liability shown on a joint return. This is known as innocent spouse relief. Here are a couple of examples:
Example 1:
• A taxpayer signs a joint return with their spouse.
• The taxpayer thought their spouse paid all taxes due.
• The IRS contacts the taxpayer because the taxes shown on the joint return were not paid.
Example 2:
• The taxpayer signs a joint return with their spouse.
• The taxpayer didn’t know about their spouse’s unreported income or erroneous deductions.
• The IRS adjusted the taxes due because of their spouse’s improper items.

To apply for Innocent Spouse Relief, a taxpayer fills out Form 8857, Request for Innocent Spouse Relief.
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IRS Announces 2018 Pension Plan Limitations; 401(k) Contribution Limit Increases to $18,500 for 2018

WASHINGTON — The IRS announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2018.

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2018.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2018:
• For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
• For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000, up from $99,000 to $119,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $189,000 and $199,000, up from $186,000 and $196,000.
• 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.

The income phase-out range for taxpayers making contributions to a Roth IRA is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly, up from $62,000; $47,250 for heads of household, up from $46,500; and $31,500 for singles and married individuals filing separately, up from $31,000.

Highlights of Limitations that Remain Unchanged from 2017
• The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
• 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.
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Proposal to End Estate Tax Renews Wealth Debate

The estate tax amounts to a rounding error in the federal budget, but the levy paid by precious few taxpayers plays an outsized role in the debate over growing income inequality and tax reform.

Opponents decry the estate tax as a wealth-sapping "death tax," a form of double taxation that punishes hard-working Americans for their financial success. Proponents say it's an appropriate way to tax the wealthy, and a useful barrier to creating a new American aristocracy.

President Donald Trump in late September unveiled a tax proposal that includes eliminating the estate tax, although it's no sure thing that he'll persuade Congress to go along.

Politically, killing the estate tax is a tough sell because it's paid only by the rich: It applies exclusively to individual taxpayers who die with a nest egg of $5.49 million or more. The limit for married couples is $10.98 million.

Fewer than 1 in 500 Americans who die in a given year are wealthy enough to pay the tax, according to the nonpartisan Tax Policy Center. It estimates that just 5,460 Americans will owe the estate tax in 2017.

Few Americans pay the estate tax imposed at a rate of 40 percent because few manage to accumulate millions. Those who are wealthy enough to worry about the estate tax often hire teams of accountants and estate-planning attorneys to create trusts, buy life insurance policies and employ other strategies to minimize the bill. If you're really hyper-focused on this, there are lots of techniques perfectly legal that you can use to move assets to the next generation during your lifetime.

The estate tax last came under attack when George W. Bush was president. In 2001, the amount of estates subject to tax was just $650,000. However, that limit rose sharply under Bush's tax cuts. In 2010, during a one-year hiatus, the estate tax didn't exist at all.

The estate tax generates an estimated $20 billion a year, and opponents say it serves as a disincentive to accumulating wealth. However, independent observers dispute that notion. It's possible some people work a little less hard but there's no strong evidence that having the estate tax retards economic activity.

Democrats already have seized on ending the estate tax as a boon to Trump's children. If the president were to leave an estate worth $1 billion to his heirs, they'd owe $400 million in estate taxes under current tax policy.

Even before Congress votes on Trump's tax proposal, the president has moved to take the bite out of the estate tax. Treasury Secretary Steven Mnuchin said that he was reversing Obama-era rules that would have boosted estate taxes on family-owned businesses.

Charities fret that the end of the estate tax would remove a powerful incentive for wealthy donors. Philanthropists often time major contributions to coincide with their deaths, a move that eases fears of outliving their money. As an additional incentive, donations aren't subject to the estate tax, essentially creating a 40 percent discount on large gifts. Tax experts say ending the estate tax could force charities to work harder for donations.
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With 2017 Extension Deadline Passed, All Eyes on 2018

Now that the tax return extension filing deadline has passed, look ahead and get ready for next year. Taxpayers still have time to take these three actions that may affect the 2017 tax return they will file in 2018.
1. Charitable contributions. Taxpayers can deduct contributions that they make to charitable organizations only in the year the donation is made. There is still time for taxpayers to contribute to a charity before the end of 2017. After several storms this year, many taxpayers are making donations to disaster relief organizations. Taxpayers can use the IRS Exempt Organization Select Check tool on to make sure that these charities and any other tax-exempt organization is eligible to receive tax-deductible contributions.
2. IRA distributions. Taxpayers over age 70 ½ should receive payments from their individual retirement accounts and workplace retirement plans by the end of 2017. A special rule allows those who reached 70 ½ in 2017 to wait until April 1, 2018 to receive their distributions.
3. IRA Contributions. Taxpayers generally must make workplace retirement account contributions by the end of the year. However, they can make 2017 IRA contributions until April 17, 2018.
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5 Tax Tips for Hurricane Victims

Recent hurricanes have left many homeowners and businesses with major, unprecedented damage. In addition to the widespread property losses, disasters can have tax and other financial implications. Fortunately, a new law passed on September 29 provides special tax breaks for victims of Hurricanes Harvey, Irma and Maria. If you’ve been affected, consider these five tips as you work to rebuild your home or business.

1. Take advantage of more valuable personal casualty loss write-offs

For federal income tax purposes, you suffer a casualty loss when your property’s fair market value is reduced or obliterated by a sudden event such as a hurricane, flood, storm, fire or earthquake to the extent losses aren’t covered by insurance. Property losses due to theft or vandalism also count as casualty losses.

Normally, personal casualty loss deductions are significantly less than what taxpayers expect — or may be nothing at all — due to limitations in tax law. But the new law loosens the restrictions to allow recent hurricane victims larger deductions. Here’s what changed:
• You must normally reduce the loss amount (after offsetting it by applicable insurance proceeds) by $100. Under the new law, this $100 limitation per casualty is increased to $500. However, even though this amount went up, eligible victims can claim a larger deduction as described below.
• Generally, you must further reduce your loss by 10% of your adjusted gross income (AGI) for the year you would claim the loss on your tax return. Under the new law, this requirement is eliminated for Hurricane Harvey losses.
• You normally don’t get a deduction if you don’t itemize. But under the new law, this requirement is eliminated for eligible hurricane victims so even non-itemizers get a deduction.
Example: You incurred a $30,000 personal casualty loss last year, had AGI of $150,000 and itemized your deductions. Your allowable deduction would have been only $14,900 ($30,000 minus $100 minus $15,000). (If instead your loss was $15,100 or less, you would have gotten no write-off at all.) Under the new law, if you sustain a $30,000 qualified disaster-related loss due to Hurricane Harvey, Irma or Maria, your allowable deduction will be $29,500 ($30,000 minus $500).

2. Understand business casualty loss write-offs

If you have disaster losses to business property, you can deduct the full amount of the uninsured loss as a business expense on your entity’s tax return or on the appropriate Form 1040 schedule if you operate as a sole proprietor. As with personal casualties, you can opt to claim 2016 deductions for 2017 losses in a federally declared disaster area.

3. Beware of taxable involuntary conversion gains

If you have insurance coverage for disaster-related property damage under a homeowners, renters, or business policy, you might actually have a taxable gain instead of a deductible loss.

If the insurance proceeds exceed the tax basis of the damaged or destroyed property, you have a taxable profit under tax law. This is true even if the insurer doesn’t fully compensate you for the pre-casualty value of the property. These are called “involuntary conversion gains” because the casualty causes your property to suddenly be converted into cash from insurance proceeds.

When you have an involuntary conversion gain, you generally must report it as taxable income unless you make a special election to defer the gain and make sufficient expenditures to repair/replace the affected property.

If you make the gain-deferral election, you’ll have a taxable gain only to the extent the insurance proceeds exceed what you spend to repair/replace the property. The expenses generally must occur within the period beginning on the damage or destruction date and ending two years after the close of the tax year in which you have the involuntary conversion gain. The deferred gain amount is subtracted from your basis in the affected property.

4. Take note of special principal residence rules

For federal income tax purposes, special rules apply to involuntary conversion gains on principal residences. For this purpose, principal residence means the place has been your main home for at least the last two years. Some benefits depend on whether you own your principal residence:

For a principal residence you own: You can probably use the federal gain exclusion tax break to reduce or eliminate any involuntary conversion gain. The maximum gain exclusion is $250,000 for unmarried homeowners and $500,000 for married joint-filing couples. To qualify for the maximum exclusion, you must have owned and used the property as your main home for at least two of the last five years. If you still have a gain after taking advantage of the gain exclusion tax break, you have four years (instead of the normal two years) to make sufficient expenditures to repair or replace the property and thereby avoid a taxable involuntary conversion gain if your residence was damaged or destroyed by an event in a federally declared disaster area.

For a home you own or rent: If contents in your principal residence were damaged or destroyed by an event in a federally declared disaster area, there is no taxable gain from insurance proceeds that cover losses to unscheduled personal property. In other words, you don’t need to repair or replace contents to avoid a taxable involuntary conversion gain. You can do whatever you want with insurance money from unscheduled personal property coverage without tax concerns. This beneficial rule applies whether you own your principal residence or not.

5. You may be able to tap into your retirement account

The IRS previously announced that 401(k) plans and similar employer-sponsored retirement plans can make loans and hardship distributions to Hurricane Harvey victims and members of their families with streamlined procedures and liberalized hardship distribution rules. The new law provides additional relief to eligible taxpayers.

Under current law, if a participant takes distributions from a qualified retirement plan before age 59½, a 10% early withdrawal penalty is due on the amount withdrawn, unless the taxpayer meets the rules for one of several exceptions. Regular income tax is also due on the amount. Under the new law, eligible victims under age 59½ can take tax-favored distributions from retirement plans without paying the 10% early withdrawal penalty. They’re also allowed the option of spreading the income resulting from the distributions over a three-year period.

In addition, the new law provides more flexibility to eligible hurricane victims by allowing them to borrow more from their accounts. It also removes some loan limitations and delays certain repayment dates.

As you work to rebuild, be sure to consult with a tax advisor for a full explanation of the implications of a major property loss as there could be additional considerations in your situation. This area of the tax law can be complicated, but the tax dollars involved may be significant.
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Gifts to Charity: Six Facts About Written Acknowledgements

Throughout the year, many taxpayers contribute money or gifts to qualified organizations eligible to receive tax-deductible charitable contributions. Taxpayers who plan to claim a charitable deduction on their tax return must do two things:
• Have a bank record or written communication from a charity for any monetary contributions.
• Get a written acknowledgment from the charity for any single donation of $250 or more.
Here are six things for taxpayers to remember about these donations and written acknowledgements:
• Taxpayers who make single donations of $250 or more to a charity must have one of the following:
o A separate acknowledgment from the organization for each donation of $250 or more.
o One acknowledgment from the organization listing the amount and date of each contribution of $250 or more.
• The $250 threshold doesn’t mean a taxpayer adds up separate contributions of less than $250 throughout the year.
o For example, if someone gave a $25 offering to their church each week, they don’t need an acknowledgement from the church, even though their contributions for the year are more than $250.
• Contributions made by payroll deduction are treated as separate contributions for each pay period.
• If a taxpayer makes a payment that is partly for goods and services, their deductible contribution is the amount of the payment that is more than the value of those goods and services.
• A taxpayer must get the acknowledgement on or before the earlier of these two dates:
o The date they file their return for the year in which they make the contribution.
o The due date, including extensions, for filing the return.
• If the acknowledgment doesn't show the date of the contribution, the taxpayers must also have a bank record or receipt that does show the date.
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Oct. 24 is Deadline for Foreign Financial Institutions Participating in FATCA to Check Their Renewal Requirement

WASHINGTON – Internal Revenue Service officials urged foreign financial institutions to quickly renew their Foreign Financial Institution (FFI) agreements if required. If an FFI is required to renew its agreement and fails to do so by Oct. 24, 2017, the group will be removed from the November FFI list and will be subject to a 30 percent withholding tax on certain U.S. source payments.
An FFI must determine whether it is required to renew its FFI agreement. The table below is provided to assist FFIs with the determination. If an FFI has determined that it is required to renew, the FFI should log into the FATCA FFI Registration system and click on the link to “Renew FFI Agreement.” The FFI will need to verify, update (if needed), and submit their registration to renew their FFI agreement.
Renewal of FFI Agreement
Financial Institution’s FATCA Classification in its Country/ Jurisdiction of Tax Residence Type of Entity FFI Agreement Renewal Required?
Participating Financial Institution not covered by an IGA; or a Reporting Financial Institution under a Model 2 IGA Participating FFI not covered by an IGA Yes
Reporting Model 2 FFI Yes
Registered Deemed-Compliant Financial Institution (including a Reporting Financial Institution under a Model 1 IGA) Reporting Model 1 FFI operating branches outside of Model 1 jurisdictions Yes, on behalf of branches operating outside of Model 1 jurisdictions (other than related branches)
Reporting Model 1 FFI that is not operating branches outside of Model 1 jurisdictions; No
Registered deemed-compliant FFI (regardless of location) No
None of the above Sponsoring entity No
Direct reporting NFFE No
Trustee of Trustee-Documented Trust No
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IRS Gives Tax Relief to Victims of California Wildfires; Extension Filers Have Until Jan. 31 to File

WASHINGTON –– Victims of wildfires ravaging parts of California now have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for taxpayers with valid extensions that run out this coming Monday, Oct. 16.

Currently, the IRS is providing relief to seven California counties: Butte, Lake, Mendocino, Napa, Nevada, Sonoma and Yuba. Individuals and businesses in these localities, as well as firefighters and relief workers who live elsewhere, qualify for the extension. The agency will continue to closely monitor this disaster and may provide other relief to these and other affected localities.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Oct. 8, 2017. As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes originally due during this period.

This includes the Jan. 16, 2018 deadline for making quarterly estimated tax payments. For individual tax filers, it also includes 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief.

A variety of business tax deadlines are also affected, including the Oct. 31 deadline for quarterly payroll and excise tax returns. Calendar-year tax-exempt organizations whose 2016 extensions run out on Nov. 15, 2017 also qualify for the extra time.

In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due after Oct. 8 and before Oct. 23, if the deposits are made by Oct. 23, 2017.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes firefighters and workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2017 return normally filed next year) or the return for the prior year (2016). The tax relief is part of a coordinated federal response to the damage caused by these wildfires and is based on local damage assessments by FEMA.
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Fake Insurance Tax Form Scam Aims at Stealing Data

WASHINGTON – The IRS alerted tax professionals and their clients to a fake insurance tax form scam that is being used to access annuity and life insurance accounts. Cybercriminals currently are combining several tactics to create a complex scheme through which both tax professionals and taxpayers have been victimized.

There may be variations but here’s how one scam works: The cybercriminal, impersonating a legitimate cloud-based storage provider, entices a tax professional with a phishing email. The tax professional, thinking they are interacting with the legitimate cloud-based storage provider, provides their email credentials including username and password. With access to the tax professional’s account, the cybercriminal steals client email addresses. The cybercriminal then impersonates the tax professional and sends emails to their clients, attaching a fake IRS insurance form and requesting that the form be completed and returned. The cybercriminal receives replies by fax and/or by an email very similar to the tax professional’s email – using a different email service provider or a slight variation to the tax pro’s address.

The subject line varies but may be “urgent information” or a similar request. The awkwardly worded text of the email states:

Dear Life Insurance Policy Owner,
Kindly fill the form attached for your Life insurance or Annuity contract details and fax back to us for processing in order to avoid multiple (sic) tax bill (sic).

The cybercriminal, using data from the completed form, impersonates the client and contacts the individual’s insurance company. The cybercriminal then attempts to obtain a loan or make a withdrawal from those accounts.

Individuals who receive the insurance tax form scam email should forward it to and then delete it. Individuals who completed and returned the fake tax form should contact their insurance carrier for assistance.
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