State Non-Conformity to the Federal Tax Laws


  Non-Conformity of State Tax Returns: For example, California (CA) state tax laws and New York (NY) state tax laws do not conform to the new federal tax laws (California tax laws and New York tax laws are similar to 2017 CA & NY state tax returns and earlier CA & NY state tax returns).  If your state tax return does not conform to the new federal tax laws, then your State tax return will require Additions and/or Subtractions and have a fee starting at $150 for each state tax return.

Affordable Care Act

The affordable Care Act requires most Americans to have qualified Health Insurance.  If you don’t have health insurance for 3 or more months during the year, you may be subject to a penalty for 2017 & 2018. This law was repealed for 2019.

Medical Expenses

Medical Expense for 2019 have a 10% deductibility of AGI (Adjusted Gross Income) instead of 7.5% for 2017 & 2018.  Seniors are excluded.

Education expense:

My child is graduating from college in May 2017. I paid the tuition. Can I let my child claim the lifetime learning credit?

Yes. If your income is too high to allow you to benefit from the credit, you can let your child use it. To do this, you must forego the dependency exemption you would otherwise have claimed for her.

2018 Annual Gift Giving

The annual gift giving is $15,000 to individuals.  $11.2 million for a one-time MFJ gift-tax exclusion. $5.6 million for a one-time Single gift-tax exclusion.

Charity Deductions

If you have a charity deduction of more than $250 to any one organization you are required to get a receipt.  The receipt must state that you received no goods or services for the donation.  A cancelled check is also needed.  The IRS has been looking into charity deductions closely.

Reward Points

Income from Redemption of Bank Rewards Points:  Credit card companies widely advertise cash backs, points, and other rewards to encourage spending, which in turn translates in to more frequent use of their cards.  Usually, customer rewards, such as rebates, are not taxable; they are viewed as price reductions.  However, when points are redeemed in cash or property, they may become taxable.

IRS Limits for 2019

401 (k) Limit: $19,000Catch Up Contribution (50 or older): $6,000,

401(k) Limit (50 or older): $25,000415(c) (Total - Employer & Employee)Employee Under Age 50 = $56,000

Employee 50 or Older = $56,000

401(a)(17) (Income limit for B & C) = $270,000

Health Savings Account (Individual) = $3,400

Health Savings Account (Family) = $6,750Health Savings Account (Catch -up Contribution, 55 or older) = $1,000

Traditional and Roth IRA Contribution Limits: $6000

Traditional and Roth IRA (50 or older) Limit: $7000

SEP (Self Employment Program) IRA Limit: $56000

2018 Mileage Rates

Business Mileage = $0.545 per mile
Medical Mileage = $0.18 per mile
Moving Mileage = $0.18 per mile (may not apply to most moves based on new federal tax laws)
Charity Mileage =  $0.14 per mile

2017 Mileage Rates

Business Mileage = $0.535 per mile
Medical Mileage = $0.17 per mile
Moving Mileage = $0.17 per mile
Charity Mileage= $0.14 per mile

Records Not Adequate to Substantiate Mileage

A business deduction for mileage was not allowed by the IRS because the tax payers recordkeeping was not contemporaneous. The taxpayer testified that he drove 8,687 miles for his business in order to distribute advertising materials to attract new clients. He did not provide to the court any contemporaneous records of his business miles for the year in question. Instead, the taxpayer produced a copy of a calendar for the year in question along with printouts of directions generated by the website MapQuest that had been prepared until two years after the fact. These records were prepared after the taxpayer’s returns were under audit. Some of the dates on the calendar were circled to signify that the taxpayer used his automobile for business on those dates. The calendar contained no other information besides the circled dates, such as notations of miles, places, or business appointments, or the business purpose of the travel. The MapQuest directions show the distance between the taxpayer’s residence and various towns to which he allegedly traveled for business. The taxpayer wrote a list of dates on each page of directions, apparently to signify that he took trips on those days to and from the particular location on that page of directions. These dates are the same as the dates circled on the calendar. The court said both the calendar and the MapQuest directions were prepared two years after the taxpayer allegedly used his car for business travel. Therefore, neither the calendar nor the MapQuest directions were made at or near the time of the alleged business use of his car, as required by Regulation section 1.274-5T(c)(2)(ii). Accordingly, neither the calendar nor the MapQuest directions were adequate records of the amount of business mileage, the date of the use, and the business purpose of the use. Furthermore, because of the large gap in time between the alleged dates of the taxpayer’s business travel and the creation of his records, the court concluded that neither the calendar nor the MapQuest directions are corroborative evience sufficient to establish the amount of business mileage, the date of the use, and the business purpose of the use.


New Self-Certification Procedure for Missed Rollover Deadlines

Any amount distributed from a qualified retirement plan or an IRA is excluded from income if it is transferred to an eligible retirement plan or IRA no later than the 60th day following the day of distribution. A similar rule applies to annuity plans, 403(b) plans, and 457 governmental plans. The IRS has the authority to waive the 60-day rollover requirement when the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual who fails to meet the 60-day rollover requirement. The IRS has in the past established a letter-ruling procedure for taxpayers to write to the IRS and request a waiver of the 60-day rollover requirement. The IRS has recently issued a new procedure for written self-certification for taxpayers requesting a waiver. The self-certification is not an automatic waiver by the IRS of the 60-day rollover requirement. However, a taxpayer may report the contribution as a valid rollover and assume that the 60-day rollover requirement is waived, unless later informed otherwise by the IRS. Conditions for self-certification. To use the new self-certification procedure, the IRS must not have previously denied a waiver request with respect to a rollover of all or part of the distribution to which the contribution relates. The taxpayer must have missed the 60-day deadline because of the taxpayer’s inability to complete a rollover due to one or more of the following reasons: a) An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates. b) The distribution, having been made in the form of a check, was misplaced and never cashed. c) The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan. d) The taxpayer’s principal residence was severely damaged. e) A member of the taxpayer’s family died. f) The taxpayer or a member of the taxpayer’s family was seriously ill. g) The taxpayer was incarcerated. h) Restrictions were imposed by a foreign country. i) A postal error occurred. j) The distribution was made on account of a levy under IRC section 6331 and the proceeds of the levy have been returned to the taxpayer. k) The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

Contributions. The contribution must be made to the plan or IRA as soon as practicable after the reason or reasons listed above no longer prevent the taxpayer from making the contribution. This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason or reasons no longer prevent the taxpayer from making the contribution. Plan administrator or IRA trustee. For purposes of accepting and reporting a rollover contribution into a plan or IRA, a plan administrator or IRA trustee may rely on a taxpayer’s self-certification in determining whether the taxpayer has satisfied the conditions for a waiver of the 60-day rollover requirement. The plan administrator or IRA trustee may not rely on the self-certification for any other purpose other than what is listed in this Revenue Procedure. The plan administrator or IRA trustee also cannot rely on the self-certification if the plan administrator or IRA trustee has actual knowledge that is contrary to the self-certification. Format for written self-certification. A taxpayer may make the self-certification by using the model letter in the appendix of Revenue Procedure 2016-47 on a word-for-word basis or by using a letter that is substantially similar in all material respects. A copy of the certification should be kept in the taxpayer’s files and be available if requested on audit.

Special Note: The Revenue Procedure provides no information on filing the self-certification with the IRS. Instead, the self-certification is used to inform the plan administrator or IRA trustee that the contribution qualifies as a rollover. The self-certification is also used by the taxpayer to allow the IRS to grant the waiver during an examination of the taxpayer’s income tax return in the event that the taxpayer is audited.


Real Estate Professional Status Still Requires Material Participation

A taxpayer cannot deduct losses from passive activities in excess of income from passive activities in any given tax year. A passive activity is generally any business activity in which the taxpayer does not materially participate. Rental activities are generally automatically treated as passive activities even if the taxpayer materially participates in the activity.  Real estate professional status is an exception to that rule. Rental activities conducted by real estate professionals are not automatically treated as passive activities. This case deals with whether or not a rental loss is automatically treated as non-passive if the taxpayer is a real estate professional, or whether the taxpayer’s real estate professional status merely removes the automatic treatment that his or her rental losses are passive. The taxpayer worked as a licensed real estate agent. The taxpayer also owned several rental properties that sustained losses for the years in question. The IRS disallowed the rental losses claiming that the taxpayer failed to show that she materially participated in the rental activities. The taxpayer argued that her status as a real estate professional automatically made her rental losses non-passive. Both the IRS and the taxpayer agreed that she was a real estate professional. The court said the statute favors the IRS’s interpretation. IRC Section 469(c)(1) states the general rule that any activity in which a taxpayer does not materially participate is passive. Next, IRC Section 469(c)(2) states that a rental activity is passive, regardless of whether the taxpayer materially participates. Next, IRC Section 469(c)(7) states if the taxpayer is a real estate professional, paragraph (2) of Section 469(c) does not apply. The court said the effect of the (c)(7) exception is merely that paragraph (2) does not apply. If paragraph (2) does not apply, then the general rule under IRC Section 469(c)(1) applies, meaning the activity is passive unless the taxpayer materially participates. The regulations also support this interpretation. Regulation Section 1.469-9(e)(1) states: “Section 469(c)(2) does not apply to any rental real estate activity of a taxpayer for a taxable year in which the taxpayer is a qualifying taxpayer under paragraph (c) of this section. Instead, a rental real estate activity of a qualifying taxpayer is a passive activity under Section 469 for the taxable year unless the taxpayer materially participates in the activity.”

Ruling: The court ruled even though the taxpayer was a real estate professional, she could not deduct her rental activity losses because she did not materially participate in her rental activities. 

Special Note: The issue of whether or not the taxpayer had grouped her rental activities with her real estate agent activity was not addressed by the court. The regulation cited by the court goes on to state that if the election is made to group all activities together, all of the activities are treated as one activity. Without the grouping election, each activity must separately meet the material participation test to qualify as non-passive.


General Knowledge Not Deductible

The taxpayers were employed by Seminole State College. The husband taught math and communications classes as an adjunct professor, and the wife was employed as a campus librarian. The husband holds a doctorate degree in communication. He explained at trial that individuals holing such terminal degrees bear a lifelong burden of developing knowledge, finding knowledge, exploring, and essentially self-educating. He testified that all expenses paid in adding to his general knowledge should be deductible as unreimbursed employee business expenses. The taxpayers deducted as unreimbursed employee business expenses the cost of their internet, television, books, DVDs, and CDs. The court said a taxpayer may deduct the cost of home internet service under IRC Section 162 if the expense is ordinary and necessary in the taxpayer’s trade or business. To the extent such expenses are personal, they are not deductible. The taxpayer argued his internet access contributed to increasing his general knowledge. Likewise, he argued that the cost of his books, CDs, and DVDs were necessary to expand his general knowledge and to be effective at his job. The taxpayer admitted in court that he was aware of no university that requires professors to purchase these materials and services in carrying on their jobs. The court said the pursuit of general knowledge does not seem like an ordinary and necessary business expense for a college professor. It is more in the nature of a personal expense. While the court agreed that the taxpayers spent significant time and resources educating themselves, such expenses are not ordinary and necessary for the trades of being a professor or a campus librarian. Rather, such expenses are nondeductible personal, living, or family expenses.