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Monday January 22, 2018
Tax Cuts and Jobs Act Single and Married Couple Examples
With passage of the Tax Cuts and Jobs Act, there will be substantial changes in tax payments for many Americans in 2018. A common question is, "What will the impact be on me?"
The nonpartisan Urban-Brookings Tax Policy Center has published seven examples for married couples and single persons. These examples are helpful in understanding how the substantial tax changes will affect individual taxpayers.
IRS Permits Some 2017 Property Tax Deductions
In IR-2017-210, the IRS explained how some homeowners who paid property taxes in December of 2017 may qualify for an itemized deduction.
After the Tax Cuts and Jobs Act was enacted on December 22, 2017, many homeowners rushed down to county offices to pay their property tax. Because deductions for state and local taxes (SALT) in 2018 are limited to $10,000, these homeowners will not be able to deduct all of their state and local taxes in future years.
In response to a blizzard of questions from taxpayers, the IRS explained how to qualify for a deduction.
The basic rule is, "A taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depending on whether the taxpayer makes the payment in 2017 and their real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017."
Example 1: Harry Homeowner's county assesses property on July 1, 2017 for the period from that date June 30, 2018. The first installment is due September 30 and the second on January 31, 2018. Harry may pay the January 31, 2018 bill in December of 2017 and qualify for an itemized deduction on his 2017 tax return.
Example 2: Harry Homeowner's county allows taxpayers to prepay the assessment for July 1, 2018 to June 30, 2019. This is a tax for year 2018 and a prepayment in December 2017 is not deductible.
Gross Overvaluation of Conservation Easement
In Roth, John L. et ux. v. Commissioner; No. 5544-12; TC. Memo. 2017-248 (28 Dec 2017), the Tax Court accepted a stipulated value for a conservation easement donation. Because the claimed value was $970,000 and the stipulated value was $30,000, the Sec. 6662(h) 40% penalty was applicable.
In 2007, taxpayers John and Deanne Roth deeded a conservation easement on 40 acres in Prowers County, Colorado to a qualified nonprofit. They reported a $970,000 charitable deduction during tax years 2007 and 2008.
The IRS audited and claimed the conservation easement value was zero. The Service assessed a Sec. 6662(a) 20% accuracy penalty and a 40% gross valuation misstatement penalty.
The party stipulated the conservation easement value was $30,000. The Tax Court noted that the Sec. 6662(a) 20% penalty is applicable if the claimed value was 150% or more of the correct amount. However, there is a Sec. 6664(c) exception to the penalty if the taxpayer can show reasonable cause. The Roths qualified for this exception.
The taxpayer claimed the IRS had not followed the correct procedures to have a supervising officer sign the penalty as required under Sec. 6751(b). The Tax Court noted the IRS may assert penalties in answers to pleadings. With a claimed value of $970,000 and $30,000 in stipulated amount, the 40% gross overvaluation penalty was applicable.
Applicable Federal Rate of 2.6% for January -- Rev. Rul. 2018-1; 2018-2 IRB 1 (17 Dec 2017)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2018. The AFR under Section 7520 for the month of January will be 2.6%. The rates for December of 2.6% or November of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return.
Published December 29, 2017