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New Developments Information on Sec. 199A, Tax Benefit Rule & More.

The IRS recently released the following draft forms to be used to compute the IRC See. 199A deduction:

* form 8995. Qualified Business Income Deduction Simplified Computation; and

* form 8995-A, Qualified Business Income Deduction.

In addition, the IRS issued a Fact Sheet (FS-2018-8, Apr. 11, 2019), which discusses various aspects of this deduction and also states "The Form 1040 Instructions and Publication 535 provide worksheets to compute the deduction." Publication 535 is called Business Expenses.

Tax Benefit Rule

Rev. Rul. 2019-11 (IRB 2019-17. April 22, 2019) answers the following question: If a taxpayer received a tax benefit from deducting state and local taxes in 2018 and recovers all or a portion of those taxes in 2019, what portion of the refund must the taxpayer include in 2019 gross income?

This ruling discusses four situations under these facts for 2018:

* The taxpayers were unmarried individuals whose filing status was "single" and who itemized deductions on their federal income tax returns in lieu of using their 812,000 standard deduction.

* They did not pay state and local taxes in carrying on a trade or business or for an activity described in Sec. 212.

* These taxpayers used the cash method of accounting, were not subject to the alternative minimum tax and were not entitled to any tax credits.

Rationale

If the taxpayers in situations 1 through 4 (below) had paid only the proper amount of state and local taxes in 2018, then their itemized deductions may have been lower or they may have used the standard deduction. Therefore, in each situation, the taxpayer must determine the amount of itemized deductions that the taxpayer would have deducted in 2018 if the taxpayer paid only the proper amount of state and local taxes.

The taxpayer must then compare this amount to the total itemized deductions claimed for 2018 or to the standard deduction that could have been taken for 2018. Thc difference must be included in 2019 gross income if the taxpayer received a tax benefit from the itemized deductions claimed for 2018.

This rationale is illustrated in the following four situations.

Situation 1: State Income Tax Refund Fully Includable in 2019 Gross Income Mr. A paid the following taxes in 2018:

Local real property taxes $ 1.000

State income taxes $5.000

Total state and local taxes $9,000

This deduction was not limited by Sec.

164(b)(6) because it was below $10,000. Mr. A claimed the following itemized deductions on his 2018 federal income tax return:

State and local taxes $, 9,000

Other allowable itemized deductions $ 5.000

Total itemized deductions $14,000

In 2019, Mr. A received a $1,500 state income tax refund due to his overpayment of his 2018 state income taxes.

If Mr. A paid only the proper amount of his 2018 state income taxes, his state and local tax deduction would have been reduced from 89,000 to 87,500. Consequently, Mr. As itemized deductions would have been reduced from 814,000 to 812,500, a difference of 81,500.

Thus, Mr. A received a 81,500 lax benefit from his 81,500 overpayment of his 2018 state income taxes. Hence, he must include the entire 81,500 state income tax refund in his 2019 gross income.

Situation 2: State Income Tax Refund Not Includable in 2019 Gross income Ms. B paid the following taxes in 2018:

Local real property taxes $ 5,000

State income taxes $7.000

Total state and local taxes 81 2.000

The deduction for these taxes was limited by Sec. 164(b)(6) to 810,000.

Ms. B claimed the following itemized deductions on her 2018 federal income tax return:

State and local taxes 810,000

Other allowable itemized deductions 85.000

Total itemized deductions 815.000

In 2019, Ms. B received a $750 state income tax refund due to her overpayment of her 2018 slate income taxes.

If Ms. B paid only the proper amount of her 2018 state income taxes, her state and local tax deduction would still be 810,000. Consequently, Ms. B's itemized deductions would still be SI5.000.

Thus. Ms. B received no tax benefit from her 8750 overpayment of her 2018 state income taxes. Hence, she is not required to include the 8750 state income tax refund in her 2019 gross income.

Situation 3: State Income Tax Refund Partially Includable in 2019 Gross Income

Mr. C paid the following taxes in 2018: Local real property taxes $5,000

State income taxes 86.000

Total state and local taxes SI 1,000

The deduction for these taxes was limited by Sec. 164(b)(6) to 810,000.

Mr. C claimed the following itemized deductions on his 2018 federal income tax return:

State and local taxes 810,000

Other allowable itemized deductions 85.000

Total itemized deductions $15 (100

In 2019, Mr. C received a 81,500 state income tax refund due to his overpayment of his 2018 state income taxes.

If Mr. C paid only the proper amount of his 2018 state income taxes, his state and local tax deduction would have been reduced from $10,000 to $9,500. Consequently, Mr. C's itemized deductions would have been reduced from 315,00 to $14,500, a difference of S500.

Thus, Mr. C received only a $500 tax benefit from his 81,500 overpayment of his 2018 state income taxes. Hence, he must include only $500 of his state income tax refund in his 2019 gross income.

Situation 4: Standard Deduction Could Have Been Allowable

Ms. D paid the following taxes in 2018:

Local real property taxes $ 4,250

State income taxes $ 6.000

Total state and local taxes $10.250

The deduction for these taxes was limited by Sec. 164(b)(6) to $10,000.

Ms. D claimed the following itemized deductions on her 2018 federal income tax return:

State and local taxes $10,000

Other allowable itemized deductions $2.500

Total itemized deductions $12,500

In 2019. Ms. 1) received a $1,000 state income tax refund due to her overpayment of her 2018 state income taxes.

If Ms. D paid only the proper amount of her 2018 state income taxes, her state and local tax deduction would have been reduced from $10,000 to $9,250. Consequently, Ms. D's itemized deductions would have been reduced from 812,500 to 311,750--which is less than the $12,000 standard deduction that she could have taken for 2018.

Her 2018 tax benefit is computed as follows:

Itemized deductions claimed $12,500

Standard deduction that could have been claimed $12,000

Difference 3500

Thus, Ms. D received only a $500 tax benefit from her $1,000 overpayment of her 2018 slate income taxes. Hence, she must include only $500 of her state income tax refund in her 2019 gross income.

Estimated Tax Relief

General Rule

An estimated tax penalty can be avoided if, generally, the required annual estimated tax payments for the current tax year equal the lesser of:

1. 90 percent of the tax shown on the income tax returns for the current tax year; or

2. 100 percent of the tax shown on an individual's return for the preceding tax year or 110 percent if the individual's adjusted gross income on that preceding year's return exceeded $150,000 ($75,000 for a married individual filing a separate return for the current tax year). The preceding tax year must be for 12 months.

Limited Waiver

IRS Notice 2019-25 (IRB 2019-15, April 8, 2019) waives this estimated tax penalty for an individual otherwise required to make 2018 estimated tax payments by Jan. 15, 2019, if the total withholding and estimated tax payments equal or exceed HO percent of the tax shown on the individual's 2018 income tax return.

To determine if this waiver applies, taxpayers should complete Part I of Form 2210 and the worksheet included in the form's instructions. If the waiver applies, the waiver box (Form 2210, Part II, Box A) should be checked and the statement "80 Percent Waiver" should be included next to Box A. Only Page 1 of Form 2210 should be filed with the individual's 2018 income tax return to request this waiver.

Treasury Policy Statement Issued on Significant Changes to the Tax Regulatory Process

This policy statement calls for the Treasury Department and the IRS to:

1. Include a statement of good cause with immediately effective temporary regulations:

2. Continue its commitment to the notice-and-comment process;

3. Not seek judicial deference for interpretations that are set forth only in "subregulatory" guidance such as revenue rulings, revenue procedures, notices, announcements and similar pronouncements; and

4. Include a statement in notices announcing intent to propose regulations, stating that if no proposed regulations or other guidance is released within 18 months after the notice is published, the IRS will not assert a position adverse to the taxpayer based on the notice

Proposed IRS Reform

On April 9, 2019, the House of Representatives passed HR 1957, the Taxpayer First Act of 2019.

Among other IRS reforms, this bill would:

1. Establish an independent ollice of appeals within the IRS:

2. Require the IRS to submit to Congress plans to redesign the structure of (he agency to improve efficiency, modernize technology systems, enhance cyber security and better meet taxpayer needs;

3. Help protect taxpayers from tax ID theft and improve taxpayer interaction with the IRS should they become a victim of this crime;

4. Establish new safeguards to protect taxpayers against recent IRS enforcement of so-called "structuring laws"; and

5. Modify the private debt collection program to ensure lower-income taxpayers are not targeted, while also strengthening the long-term viability of the program. Bipartisan Senate tax-writing leaders introduced a companion bill, S. 928. At the lime of this writing, it is unknown when the Senate will consider HR 1957.

by Stuart R.Josephs, CPA

Stuart R.Josephs, CPA has a San Diego-based Tax Assistance Practice that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at (619) 469-6999 or stuartrjosephs@yahoo.com.
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Title Annotation:Fed Tax
Author:Josephs, Stuart R.
Publication:California CPA
Date:Jun 1, 2019
Words:1682
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