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Miscellaneous Itemized Deductions – On the Brink of Extinction or Just in a Seven-Year Ice Age? by Jeffrey M. Mutnik, CPA/PFS

Posted on March 07, 2019 by Jeffrey Mutnik

Individual taxpayers have long relied on miscellaneous itemized deductions as a catch-all for a variety of business- and investment-related expenses that the tax code did not already allow as specified itemized deductions, such as those for medical expenses or contributions to charitable organizations. However, with the passage of the new tax law, these miscellaneous itemized deductions are no longer available for taxpayers to claim on their tax returns beginning in 2018.

Many taxpayers will not even notice the removal of these deductions, which were previously subject to being phased-out based on the taxpayer’s adjusted gross income (AGI). The only way taxpayers could yield the benefits of these deductions was if the total amount exceeded 2 percent of AGI. The peculiarity of the U.S. tax system was that the more income a taxpayer earned (creating a higher AGI), the greater the likelihood that the taxpayer would have more miscellaneous itemized deductions, but continue to lose the tax benefits since the higher income also increased the 2 percent limitation of these deductions. Additionally, the higher a taxpayer’s income, the more likely they would be subject to the alternative minimum tax (AMT), which essentially eliminating all tax benefits of the miscellaneous itemized deductions.

From a public policy point of view, eliminating these deductions will raise revenue and save the IRS time and money by not having to review, audit or litigate such matters. However, the impact on taxpayers can be significant, especially when they do not engage in advance planning to account of the loss of the deduction and improve their tax positions.

For example, while the new law prohibits individual taxpayers from deducting the costs they incur for hiring professionals to prepare their tax returns, taxpayers whose returns include a business reported on Schedule C have an opportunity for that business to fully deduct the associated fees on the Schedule C. This is similar to how an incorporated business would deduct professional fees on its corporate tax return. Since fees for the preparation of an individual tax return is not always segregated into its component parts, taxpayers should request their professional accountants provide them with an appropriate allocation of these fees.

In addition, without the benefit of deductions for unreimbursed business expenses (reportable on IRS Form 2016) beginning in 2018, taxpayers should consider requesting that their employers reimburse them directly for these expenditures. The employer’s reimbursement should become a business expense deduction for the employer without becoming taxable income to the employee. The employer’s policies and procedures should be reviewed and updated appropriately.

Additionally, without the availability of the miscellaneous expense deduction in 2018, taxpayers should weigh the benefits of paying their IRA fees individually with after-tax dollars versus having their IRAs pay those fees with pre-tax dollars. Under prior law, taxpayers often chose to pay IRA fees directly from their own funds to allow their IRAs to continue to compound growth without reducing their account balances for such fees.   Along the same lines, the new law’s elimination of deductions for investment fees may compel high net worth taxpayers to potentially create new organizational structures that allow them to treat these expenses as operating deductions rather than investment costs. The family that created Lender’s Bagels may be considered a pioneer of this strategy, creating a roadmap through litigation with the IRS in the Tax Court (TC Memo. 2017-246, Lender Management, LLC). Other families will find the facts and circumstances of their unique situation do not align with this case, and they will seek out alternate strategies. No matter what route taxpayers choose to take, their decision should always be made with the benefit of advice from informed tax professionals.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at info@bpbcpa.com.

 

 

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

IRS Issues Standard Mileage Rates for 2019 by Richard Cabrera, JD, LLM, CPA

Posted on March 05, 2019 by Richard Cabrera

The IRS issued the 2019 optional standard mileage rates that taxpayers may use to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Taxpayers also have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 58 cents per mile driven for business use, an increase of 3.5 cents;
  • 20 cents per mile driven for medical care or for moving purposes, an increase of 2 cents; and
  • 14 cents per mile driven in service of charitable organizations.

It is important to note that a recently enacted change under the Tax Cuts and Jobs Act, taxpayers will not be able to use the business standard mileage rate as a miscellaneous itemized deduction for unreimbursed employee travel expenses. In addition, taxpayers cannot claim a deduction for moving expenses unless they are members of the Armed Forces on active duty under orders of a permanent change of station.

Taxpayers may not use the business standard mileage rate for any vehicles after they use any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

About the Author: Richard Cabrera, JD, LLM, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning, consulting, and mergers and acquisition services to businesses located in the U.S. and abroad. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

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