Tax Cuts & Jobs Act: 2018 Standard Deduction and Exemptions

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The Tax Cuts and Jobs Act of 2017 made dramatic changes that affected pretty much every US taxpayer. This is the first article of the series of articles on the Act. I will start this series with the discussion of simple US domestic issues (such as 2018 standard deduction and personal exemptions), then gradually turn to more and more complex US domestic and international tax issues, and finish with the examination of the highly complex issues concerning E&P income recognition for US owners of foreign corporations and the new type of Subpart F income.

Today, I will focus on the 2018 standard deduction and exemptions.

Standard Deduction for the Tax Year 2017

Standard deduction is the amount of dollars by which you can reduce your adjusted gross income (“AGI”) in order to lower your taxable income and, hence, your federal income tax. The standard deduction is prescribed by Congress. If you use standard deduction, you cannot itemize your deductions (i.e. try to reduce your AGI by the amount of actual allowed itemized deductions) – you have to choose between these two options.

Standard deduction varies based on your filing status (there is an additional standard deductions of individuals over the age of 65 or who are blind).

For the tax year 2017, the standard deduction are as follows: $6,350 for single taxpayers and married couples filing separately, $12,700 for married couples filing a joint tax return and $9,350 for heads of household.

2018 Standard Deduction and Exemptions

Under the Tax Cuts and Jobs Act of 2017, the 2018 standard deduction will virtually double in size: $12,000 for single taxpayers and married couples filing separately, $24,000 for married couples filing a joint tax return and $18,000 for heads of household. All of these amounts will be indexed for inflation.

It is important to point out, however, that these increased standard deduction amounts will only last until 2025. Then, the standard deduction should revert to the old pre-2018 law.

Personal Exemptions & Impact of 2018 Standard Deduction

Personal exemption is an additional amount of dollars by which the Congress will allow you to reduce your AGI (already reduced by either standard deduction or itemized deductions). When IRC Section 151 was enacted in 1954, the idea behind a personal exemption was to exempt from taxation a certain minimal amount a person needs to survive at a subsistence level.

Personal exemption can be claimed for you and your qualified dependents; in case of joint tax returns, each spouse is granted a personal exemption. However, a personal exemption for a spouse can be claimed even if the spouses are filing separate tax returns, but certain requirements have to be met.

For the tax year 2017, the personal exemption amount is $4,050. The exemption is subject to a phase-out at a certain level of income.

The Tax Cuts and Jobs Act of 2017 repeals personal exemptions for the tax years 2018-2025. After 2025, the law reverts to the one that existed as of the tax year 2017. In other words, the increase in 2018 standard deduction will be at least partially offset by the elimination of 2018 personal exemption.

In some cases, where taxpayers claim many personal exemptions for their dependants, the elimination of personal exemptions may actually result in the increase in taxation (compared to the 2017 law) despite the increase of 2018 standard deduction. Of course, such an increase in taxation needs to take into account potential increase in child tax credit under the new law. Hence, in order to assess the full tax impact of the tax reform for large families, one needs to consider other factors in addition to just 2018 standard deduction.

Prepaid 2018 Real Property Taxes as a Tax Strategy | Tax Lawyers News

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The Tax Cuts and Jobs Act of 2017 radically changed the US tax system with respect to deductible state and local income taxes, including real property taxes. Starting tax year 2018, real estate, person property, income taxes and sales taxes are deductible only up to $10,000. This means that people with high property taxes have a big problem – they have an expense that is no longer deductible. A question arises for tax attorneys – can these taxpayers use prepaid 2018 real property taxes to lower their 2017 tax liability?

This issue of prepaid 2018 real property taxes is the subject of the latest IRS advisory issued on December 27, 2017. Let’s explore this advisory in more detail.

Prepaid 2018 Real Property Taxes That Were Assessed and Paid in 2017

The IRS advised that prepaid 2018 real property taxes may be deductible in 2017 under specific circumstances. In particular, the IRS stated that, in situations where 2018 real property taxes were assessed and paid in 2017, such prepaid 2018 real property taxes may be deductible.

Prepaid 2018 Real Property Taxes That Are Not Yet Assessed But Paid in 2017

On the other hand, if your real property taxes for 2018 were assessed only in 2018, the prepayment in 2017 will not be deductible in 2017. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.

Examples of Deductible and Non-Deductible Prepaid 2018 Real Property Taxes

The IRS provides the following examples of deductible and non-deductible prepaid 2018 real property taxes:

Example 1: Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017 – June 30, 2018. On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.

Example 2: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018. County B intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.

IRS 2018 Standard Mileage Rates | Tax Lawyers Twin Cities

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Earlier this month, the IRS issued the option IRS 2018 standard mileage rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.Earlier this month, the IRS issued the option IRS 2018 standard mileage rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

The new IRS 2018 standard mileage rates are generally higher than the 2017 rates:

54.5 cents per mile for business miles driven (up from 53.50 cents for 2017)

18 cents per mile driven for medical or moving purposes (up from 17 cents for 2017)

14 cents per mile driven in service of charitable organizations (same as for 2017)

The higher IRS 2018 standard mileage rates are caused by higher price for gasoline. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

According to the IRS Rev. Proc. 2010-51, a taxpayer may use the business standard mileage rate to substantiate a deduction equal to either the business standard mileage rate times the number of business miles traveled. If he does use the IRS 2018 standard mileage rates, then he cannot deduct the actual costs items. Even if the IRS 2018 standard mileage rates are used, however, the taxpayer can still deduct as separate items the parking fees and tolls attributable to the use of a vehicle for business purposes.

It is important to note that a taxpayer does not have to use the IRS 2018 standard mileage rates. He always has the option of calculating the actual costs of using his vehicle rather than using the standard mileage rates. In such a case, all of the actual expenses associated with the business use of the vehicle can be used: lease payments, maintenance and repairs, tires, gasoline (including all taxes), oil, insurance, et cetera.

On the other hand, in some circumstances, a taxpayer cannot use the IRS 2018 standard mileage rates. For example, a taxpayer cannot use the IRS business standard mileage rate for a vehicle after using any MACRS depreciation method or after claiming a Section 179 deduction for that vehicle. Additionally, the business standard mileage rate cannot be used for more than four vehicles used during the same period of time. More information about the limitations on the usage of the IRS 2018 standard mileage rates can be found in the IRS Rev. Proc. 2010-51.

First Quarter 2018 IRS Underpayment Interest Rates | Tax Lawyer MN

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On December 5, 2017, the IRS announced that the First Quarter 2018 IRS underpayment interest rates and overpayment interest rates will remain the same as they were in the last quarter of 2017. This means that, the First Quarter 2018 IRS underpayment interest rates and overpayment interest rates will be as follows: On December 5, 2017, the IRS announced that the First Quarter 2018 IRS underpayment interest rates and overpayment interest rates will remain the same as they were in the last quarter of 2017. This means that, the First Quarter 2018 IRS underpayment interest rates and overpayment interest rates will be as follows:

four (4) percent for overpayments (three (3) percent in the case of a corporation);
four (4) percent for overpayments (three (3) percent in the case of a corporation);
four (4) percent for underpayments; six (6) percent for large corporate underpayments; and one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

The Internal Revenue Code requires that the rate of interest be determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The First Quarter 2018 IRS underpayment interest rates and overpayment interest rates were computed based on the federal short-term rate determined during October of 2017 to take effect on November 1, 2017, based on daily compounding.

There are two principal applications for the First Quarter 2018 IRS underpayment interest rates in the context of US international tax law. First, the First Quarter 2018 IRS underpayment interest rates are used to calculate interest on the additional tax liability that has arisen as a result of filing amended federal tax returns.  This is also true with respect to tax returns that are amended as part of the OVDP or the Streamlined Domestic Offshore Procedures voluntary disclosure package.

Second, the First Quarter 2018 IRS underpayment interest rates are relevant to calculation of a PFIC (Passive Foreign Investment Company) interest on PFIC tax imposed on “excess distribution” under the default IRC Section 1291 PFIC calculation method.

Abandoned OVDP Preclearance Requests Are Targeted by IRS

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Since January 31, 2017, all of the denied and abandoned OVDP Preclearance requests have become the target of a special IRS compliance campaign. Let’s analyze in more detail this important development and attempt to predict what may be its main consequences for noncompliant or formerly noncompliant US taxpayers.

Denied and Abandoned OVDP Preclearance Requests: OVDP Background

IRS Offshore Voluntary Disclosure Program (“OVDP” now closed, is a special program developed by the IRS to allow US taxpayers to resolve their past tax noncompliance concerning unreported foreign assets and foreign income. Under the OVDP, US taxpayers have to file delinquent FBARs and other information returns as well as amended tax returns; additionally, the taxpayers are required to pay additional tax due with interest and penalties.

In return, the IRS promises that participation in the OVDP would result in no criminal prosecution for past noncompliance. Furthermore, OVDP offers a clear and limited civil penalty exposure in the form of the Miscellaneous Offshore Penalty, which replaces all other civil penalty systems, including the draconian FBAR penalties.

What Are These Denied and Abandoned OVDP Preclearance Requests?

In order to participate in the OVDP, US taxpayers have to file a Preclearance Request with the IRS-CI (Criminal Investigation). The IRS-CI determines whether applicants are eligible to participate in the OVDP; the taxpayers who fail to meet the eligibility criteria are rejected without the possibility of further participation in the OVDP.

Additionally, especially after the Streamlined Compliance Procedures were instituted, there were a lot of taxpayers who submitted their Preclearance Requests and even certain additional information, but ultimately decided not to participate in the OVDP and/or withdrew from the OVDP. These are abandoned OVDP Preclearance Requests.

Denied and Abandoned OVDP Preclearance Requests: June of 2016 TIGTA Report

Despite the fact that the IRS was already aware of prior noncompliance of the taxpayers who submitted these denied or abandoned OVDP Preclearance Requests, it failed to do any follow-up in many of these cases. In June of 2016, TIGTA issued a report on the IRS management of OVDP. Among other matters, TIGTA recommended that the IRS review all Denied or Abandoned OVDP Preclearance Requests.

LB&I Campaign on Denied and Abandoned OVDP Preclearance Requests

Partially in response to the 2016 TIGTA report, the IRS LB&I announced an unprecedented compliance campaign on Denied and Abandoned Preclearance Requests in January of 2017. The campaign specifically targets taxpayers who were denied the participation in the OVDP or who voluntarily abandoned their Preclearance requests.

On October 26, 2017, an IRS official stated that the Denied and Abandoned OVDP Preclearance Requests Campaign is focusing on approximately 6,000 US taxpayers. It appears that the exact treatment stream will be decided on a case-by-case basis, but the IRS is hoping to review (at least at some level) this entire category of taxpayers. In other words, virtually every one of these taxpayers should expect some sort of communication from the IRS, including, potentially (and maybe even likely) full IRS audit of their tax returns and FBARs.

What Does the LB&I Campaign on Denied and Abandoned OVDP Preclearance Requests Mean for US Taxpayers

US taxpayers who abandoned their OVDP Preclearance Requests or whose requests were denied by the IRS-CI should prepare as soon as possible a viable strategy on how to deal with respect to the potential IRS audit. Right now, they are at an extremely high risk of detection and possible imposition of the IRS civil and criminal penalties.

The options are various and highly depend on the individual fact pattern of a taxpayer. In particular, a taxpayer’s legal position will depend on whether the taxpayer’s prior noncompliance was willful or non-willful and whether he abandoned his OVDP Preclearance Request or such a request was denied.

This entire analysis of a taxpayer’s legal position and available strategies for dealing with a possible IRS audit should be done by an experienced international tax lawyer who specializes in the area of offshore voluntary disclosures.

Contact Sherayzen Law Office for Professional Help With the LB&I Campaign on Denied and Abandoned OVDP Preclearance Requests

If your OVDP Preclearance Request was denied by the IRS or abandoned by you, you should contact Sherayzen Law Office for professional help as soon as possible. Our legal team is highly experienced in the area of international tax law and, specifically, offshore voluntary disclosures. In fact, we have helped hundred of US taxpayers around the globe to bring their US tax affairs into full compliance with US tax laws. We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!