Monthly News: February 2019

There are many new forms due to the tax law changes.  Don’t be fooled by the 1040, it may look simpler, but most of the line items from the old form were just moved to 6 new numbered schedules.  You will need to know which schedules are required to do your return and where to enter your information.

The 1040A and 1040EZ were eliminated.  Everyone must use the 1040.

Be prepared for long wait times when you call the IRS for assistance!  Agency workers will be swamped with people seeking help with the new tax laws and their tax problems and questions.  You may be better off using the automated tax help features on the IRS website or contacting a tax pro rather than waiting on hold with the IRS.

Many of the tax breaks have expired such as the write off for private mortgage insurance, the limited credit for energy efficient windows, lots of breaks for renewable and emerging technology, and many more.  However, congress may still renew these items during tax season.  If they renew them and you have already filed your return, you will need to file an amended return to take advantage of them.  The IRS isn’t more likely to audit amended returns than regular returns.

The underpayment penalty for 2018 has been relaxed, due to the tax changes, from 90% to 85% of what you owed in 2017.  The IRS knows that taxpayers may not have adjusted their withholding or estimated tax payments for all the changes that have been made in the new tax law.

Be sure to file your tax return.  Tax courts have determined that IRS-prepared late returns aren’t discharged in bankruptcy court.  Even if you later file the returns for the years, you previously hadn’t filed, they won’t be discharged in bankruptcy court.  The court states you didn’t make an honest attempt to follow the tax laws so the returns you filed late can’t be considered for bankruptcy, if the IRS already prepared a late return and assessed taxes for those years.

Schedule E rental income is eligible for the 20% pass-through deduction. However, you must meet the 250-hour test.  The final regulations refer to the standard under tax code Section 162.  The standard is somewhat unclear in the context of rental activity since it’s based on facts and circumstances specific to each taxpayer.  Some of the factors would be type of property leased, extent of day-to-day involvement, lease terms, number of properties rented, etc.

You must maintain separate records and a bank account for the rental property.  Starting in 2019 you’re also required to keep records that detail the hours, dates, a description of the services, and who performed them.

The 250-hour test means that at least 250 hours per year are devoted to the rental activity by the property owner, employees, or independent contractors.  Time spent on repairs, collecting rent, negotiating leases and providing tenant services apply but driving to and from the property, arraigning financing, or constructing long-term capital improvements don’t.

If the 250-hour test is met, you can treat the rental as a trade or business so you can apply the 20% pass-through deduction to it.