May 1, 2018
Miscellaneous Tax Updates
In the first three months of 2018, there have been a number of changes to tax laws that may affect your financial well-being, your family, your investments, and your livelihood. We have prepared a summary of these recent developments for your benefit.
The IRS will not accept “silent” 2017 returns. The IRS will no longer accept electronically filed 2017 tax year returns that do not report whether the taxpayer has complied with the individual mandate provisions of the Association of Chartered Accounts (ACA). Under the ACA, shared responsibility or individual mandate provision, individuals are required to obtain qualifying minimum essential coverage (MEC), receive an exemption from the coverage requirement (e.g. on account of having household income below the return filing threshold), or pay a penalty. Tax returns that did not report full-year MEC, an exemption, or pay a penalty, are referred to as “silent returns.”
The Tax Cuts and Jobs Act stipulates that for months beginning after Dec. 31, 2018, the amount of the individual shared responsibility payment is reduced to zero. Despite this, the IRS will not treat 2017 returns that are “silent” on compliance with ACA individual mandate as complete and accurate.
Batteries are now qualified for the residential energy credit. In a private letter ruling, the IRS held that a battery that was integrated into an existing solar energy system is now a qualified solar electric property expenditure eligible for the tax credit under which an individual may claim a 30% credit for qualified solar electric property expenditures made by him during the year. This means that in addition to saving on their electrical bills and tax bills by installing a solar energy system, taxpayers may be eligible for an additional tax credit while shielding themselves from grid outages due to storms and other disruptions by installing a battery that stores the energy generated by solar equipment. Please note that the battery cost will only qualify for the credit if the battery is used for the sole purpose of storing solar-generated energy.
Roth IRA conversion has been recharacterized. The IRS has announced the effective date of a provision that would prohibit a taxpayer from recharacterizing a Roth conversion. Taxpayers are prohibited from recharacterizing amounts rolled over to Roth IRAs from other retirement plans, such as Code Sec. 401(k) or Code Sec. 403(b) plans. The change in law is effective for tax years beginning after Dec. 31, 2017. The IRS website FAQ pages clarify that if taxpayer converted a traditional IRA to a Roth IRA in 2017, that taxpayer’s IRA may be recharacterized as a contribution to a traditional IRA until Oct. 15, 2018.
The offshore voluntary disclosure program is ending. The IRS announced that it will close the offshore voluntary disclosure program (OVDP) on September 28, 2018. The OVDP is a tax amnesty program that permits U.S. taxpayers with unreported foreign accounts to avoid criminal charges. The OVDP also allows U.S. taxpayers to pay reduced civil penalties by making voluntary disclosures to the IRS. This announcement will provide U.S. taxpayers with undisclosed foreign financial assets time to avail themselves of the OVDP before the program ceases to be operational.
The IRS has updated its withholding calculator. The IRS also released an updated withholding calculator on its website, as well as a new version of Form W-4, to help taxpayers assess their 2018 withholding. The IRS has also issued answers to a series of frequently asked questions about the withholding calculator. While the updated withholding tables are designed to work with existing Forms W-4 that employers have on file, many taxpayers (such as those with children or multiple jobs, and those who itemized deductions under prior law) are affected by the new law in ways that cannot be accounted for in the new withholding tables. The IRS encourages employees to use the withholding calculator and new form to perform quick “paycheck checkups” to help prevent them from exposure to insufficient or excess withholding.
Withholding on certain publicly traded partnership interests has been suspended. The IRS has announced that, pending further guidance, it will suspend withholding obligations with respect to certain publicly traded partnership (PTP) interests. The new rules state that if any portion of the gain on any disposition of an interest in a partnership would be treated as effectively connected with the conduct of a trade or business within the U.S. (i.e. as an “effectively connected gain”), then the transferee would be required to withhold a tax equal to 10% of the amount realized on the disposition.
A Note about Pending Legislation…
We also wanted to provide you with some updates regarding California legislation that is currently in process. The following California Bills have NOT been passed into law as of yet and we are still unclear about when and if they will be ratified.
California Senate Bill 227 would enact the “California Excellence Fund Tax Credit,” which would allow California taxpayers a credit against their personal income tax equal to 85% of a contribution to the California Excellence Fund. It is expected that contributions to the California Excellence Fund would also be allowed Federal charitable deductions. This bill was intended to mitigate the effects of Federal tax reform enacted in late 2017, which disallowed state income tax deductions on Federal tax returns. The Bill is currently “In Assembly” with the last reading on Jan. 30, 2018. In order to pass the bill, the Assembly will need to pass the bill in Committee hearings before sending it to the Governor for final approval.
Assembly Bill 2731 would enact an additional tax of 17% on investment management services interest beginning for tax year 2018. This bill seeks to “close the carried interest loophole” at the state level until action is taken by the federal government. Funds will be used to support educational programs. The Bill is currently in the Assembly Committee Process. It was recently passed by the first committee on April 23, 2018. Three committees must approve the Bill before it is approved by the Assembly. If the bill is approved by the Assembly, it is then sent to the Senate and the Governor for approval.
We will continue to monitor these Bills as they move through the California legislature and will keep you updated.
Please contact us for more information about any of these developments. We are happy to answer any questions you may have about your specific tax situation in relation to new and upcoming tax updates. We can help you take advantage of favorable developments and minimize the impacts of unfavorable ones.