General FAQ

 1.  I’m a U.S. citizen living and working outside of the United States for many years. Do I still need to file a U.S. tax return?

 Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusion and/or foreign income tax credits. Please refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for additional information.

 2.  I pay income tax in a foreign country. Do I still have to file a U.S. income tax return even though I do not live in the United States?

 You have to file a U.S. income tax return while working and living abroad unless you abandon your green card holder status by filing Form I-407, with the U.S. Citizen & Immigration Service, or you renounce your U.S. citizenship under certain circumstances described in the expatriation tax provisions. See Publication 519, U.S. Tax Guide for Aliens, for more details.

3.  What is the due date of a U.S. income tax return?

 The due date for filing a federal individual income tax return generally is April 15 of each year if your tax year ends December 31st. Your return is considered filed timely if the envelope is properly addressed and postmarked no later than April 15.

 If the due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day. If you cannot file by the due date of your return, you can request an extension of time to file. To receive an automatic 6-month extension of time to file your return, you should file Form 4868 Application for Automatic Extension of Time to File Individual Tax Return

However, if you are a U.S. citizen or resident alien, who is either:

    (a) living outside of the United States and Puerto Rico and your main place of business or post of duty is outside of the United States and Puerto Rico; or

    (b) in military or naval services on duty outside of the United States and Puerto Rico on the due date of your return, you are allowed an automatic 2-month extension until June 15 to file your return and pay any tax due. For additional information refer to Publication 54, see above. If you use this automatic 2-month extension, you must attach a statement to your return explaining which of the two situations qualify you for the extension.

4.  I just realized that I must file U.S. income tax returns for prior years.  How many years back do I have to file?

 You must file a federal income tax return for any tax year in which your gross income is equal to or greater than the personal exemption amount and standard deduction combined. Generally, you need to file returns going back six years. This will depend on the facts and circumstances of your particular situation. 

5.  What is the status of my refund?

You can check the status of any refund you expect as soon as 24 hours after you e-file a return or 4 weeks after you file a paper return. There are several ways to check the status of a refund.

6.  I have completed my tax return and I have a balance due. How do I pay the tax liability?

 There are various options for paying your U.S. taxes.

    (a) EFTPS (Electronic Federal Tax Payment System).

This is only available if you have a U.S. bank account.

    (b) Federal Tax Collection Service (same-day wire transfer).

If you do not have a U.S. bank account, ask if your financial institution has a U.S. affiliate that can help you make same-day wire transfers. For more information on this option, refer to the Foreign Electronic Payments website.

    (c)  Check or money order.

To pay by check or money order, make your check or money order payable to the “United States Treasury” for the full amount due. Do not send cash. Do not attach the payment to your return.

    (d) Credit or debit card.

This option is useful if you do not have a U.S. bank account.  Refer to the Pay Your Taxes by Debit or Credit Card website with details regarding this process and fees.

7.  How can I get a transcript for current or previous years?

 You can obtain either a transcript of your tax return information or a copy of your tax return. If you obtain a transcript of your return, you will get the information from your tax return. If you order a copy of your return, you will get a copy of the actual return you filed.

 Transcript: A transcript of your tax return information is free. You can obtain a free transcript on the IRS.gov website by going to the Get Transcript page. Transcripts may also be obtained by calling 800-908-9946 and following the prompts in the recorded message, or by completing and mailing a request for a transcript to the address listed in the instructions. Use Form 4506-T, Request for Transcript of Tax Return, or Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript, to obtain a transcript of most information on your tax return for the current tax year and the prior 3 processing years. You also can obtain a transcript of data from certain information returns such as Forms W-2 and 1099. You can designate (on line 5 of either form) a third party to receive the transcript.

Copy: You can request a copy of your tax return, but in most cases you must pay a fee to do so (currently $50). Use Form 4506, Request for Copy of Tax Return, to request a copy of your tax return. Copies of Forms 1040, 1040A, and 1040EZ are generally available for 7 years from the date you filed the return. You can designate (on line 5) a third party to receive the tax return. Mail the order form and your check for the fee to the appropriate address listed in the form instructions.

8.  Now that I live overseas, how can I find a tax preparer?

The IRS recently published a searchable directory, listing preparers in your area. The listed preparers currently hold professional credentials recognized by the IRS or hold an Annual Filing Season Program Record of Completion. See Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.

 9.  Are there other online resources designed to help taxpayers, especially those living abroad, meet their U.S. tax obligations?

 Yes, there are multiple resources available focused on international individual tax matters for taxpayers living abroad. For example:

   (a)The International Taxpayers page is packed with information designed to help taxpayers living abroad, resident aliens, nonresident aliens, residents of U.S. territories and foreign students;

   (b) Brief videos of interest to taxpayers abroad are available on the International Taxpayers Videos page; and,

   (c) International Taxpayers Interactive Tools focused on taxpayers with international individual general tax questions.

End of IRS FAQ

Zaher Fallahi, CPA, Tax Attorney, licensed in California and a Washington D. C., assists Americans Living Abroad with tax preparation Taxation of Americans Living Abroad, and represents taxpayers with tax audits Tax Defense Attorney , including undisclosed foreign accounts before the IRS and Tax Court Treasury throughout the United States.

Zaher Fallahi, Esq., has been rated 10 out of 10 by Avvo Rated 10 of 10 .

Zaher Fallahi, CPA, Tax Attorney, is ranked a top tax attorney TOP Tax Attorney

About 1.8% of the U.S. lawyers are also CPAs, and we are proudly one of them.

Attorney-Client Privileged Consultation telephone appointments are available for clients with civil cases who cannot meet in person. Please call:

Toll Free 877-687-7558 (Nationwide)

(310) 719-1040 (Los Angeles)

(714) 546-4272 (Orange County)

E-mail taxattorney@zfcpa.com

Client Testimonials

Colleague Testimonials

By  Michael Cohn

Published  by Accounting Today   February 08 2019, 3:55pm EST

The Internal Revenue Service experienced a drop in both tax refunds and tax filings during the first week of tax season.

For the week ending Feb. 1, 2019, the IRS received 16,035,000 returns, compared to 18,302,000 returns in the first week of last year’s tax season, a 12.4 percent decrease. The statistics may have also reflected the impact of the partial government shutdown, which ended shortly before tax season officially began on Jan. 28. The IRS was able to process 13,306,000 returns for the week ending Feb. 1, 2019, compared to 17,931,000 in the first week of last year’s filing season, a sharp 25.8 percent drop.

The IRS also reported a decline in the number and dollar amount of tax refunds, with 4,672,000 tax refunds paid in the first week this year, compared to 6,171,000 refunds last year, a 24.3 percent drop. The average refund amount also declined, from $2,035 to $1,865, an 8.4 percent drop. The difference was even starker in terms of the total dollar amount of refunds, plummeting from $12.560 billion to $8.713 billion, a 30.6 percent tumble.

The Treasury Department pointed out that it nevertheless successfully kicked off tax-filing season last week. “Filing season has successfully launched with millions of tax returns having been filed,” said Treasury Secretary Steven Mnuchin in a statement Friday. “We thank the Treasury and IRS employees who have been working diligently to ensure the system is processing these returns efficiently.”

However, many taxpayers were complaining anecdotally on social media this past week about receiving far lower tax refunds this year or finding out that they owed heavy tax bills, thanks to the wide-ranging changes in the Tax Cuts and Jobs Act (see Taxpayers take to Twitter to voice frustration over tax refunds). Many of them were probably unaware that they needed to adjust their withholdings on their W-4 forms to account for changes like the elimination of the personal and dependent exemptions. The new tax law also eliminated or sharply limited a host of traditional tax deductions and tax breaks, while doubling the standard deduction and the Child Tax Credit. In addition, Congress failed to extend a number of popular temporary tax breaks that expired last year.

Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, spoke about the withholding problem on the Senate floor Thursday. “Most Americans have their taxes withheld from every paycheck, and the Treasury redoes the math on withholding every year,” he said. “Obviously the math gets more complicated when the Congress passes legislation like the Trump tax law, which essentially triggers a tax policy earthquake. The outcome of these decisions about how much to take out of everybody’s paychecks is clearly going to have a big impact.”

The IRS encouraged taxpayers throughout last year to do a “paycheck checkup” and use the online withholding calculator to adjust their withholdings. But Wyden accused the Trump administration of intentionally allowing taxpayers to underwithhold from their paychecks last year so their take-home pay would appear to be much larger ahead of the November elections. “It sure looks like the Trump administration decided to put politics first, lowball the estimates of how much tax should be withheld from everybody’s paychecks, and lure people into the false sense of security that they’d gotten a big tax cut, courtesy of Donald Trump,” he said.

Wyden acknowledged that the Treasury Department updated the official IRS withholding calculator online and sent out new withholding forms for employers, but he pointed out that didn’t happen until Feb 28, two months into the new tax year.

“And furthermore, let’s be realistic about the prospect of Americans flocking to the IRS withholding calculator,” he said. “The taxpayers potentially affected by this underwithholding issue are parents with jobs to do and kids to look after. How can you expect those people to spend a whole lot of time doing tax math at the beginning of 2018 in order to head off a problem they don’t know anything about, and that might show up in filing season more than a year later?”

Wyden wrote to IRS Commissioner Charles Rettig last month encouraging him to waive underwithholding penalties for 2018, and the IRS has agreed to waive the penalties for some taxpayers (see IRS to waive tax penalties for underwithholding and underpayment). But Wyden doesn’t think it’s going far enough.

“Instead of penalizing those who paid less than 90 percent of what they owed in 2018, now they’re penalizing those who paid less than 85 percent," he said. "That was one small step in the right direction. But in my judgment, the IRS should do more, and keep it simple.” End of Article published by Accounting Today

Zaher Fallahi Certified Public Accountant (CPA) since 1983, is licensed in California and Washington D. C., and assists individuals and businesses with their Tax Returns, Tax Planning and Accounting. Tel. : (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), and (877) 687-7558 toll free nationwide, E-mail   taxattorney@zfcpa.com

Click here for New Tax Law 

Click here for General Tax Planning

IRS; Protect Taxpayers from Identity Theft

Identity theft happens when someone steals someone else’s personal information for financial gain. Tax-related identity theft happens when someone uses another person’s stolen Social Security number (SSN) or Employer Identification Number (EIN) to file a tax return to obtain a fraudulent refund.

Many people first find out they are victims of identity theft when they submit their tax returns. That’s because the IRS lets them know someone else already used their SSN to file.

The IRS continues to work hard to stop identity theft with a strategy of prevention, detection and victim assistance. So far, the agency has stopped millions of dollars from getting into the hands of criminals.

The following are tips on how to protect against identity theft:

1. Taxes, Security, Together

The IRS, the states and the tax industry need everyone’s help. The IRS launched The Taxes. Security. Together. awareness campaign in 2015 to inform people about ways to protect their personal, tax and financial data. Learn more at www.IRS.gov/TaxesSecurityTogether.

2. Protect Personal and Financial Records

Taxpayers should not carry their Social Security card in their wallet or purse. They should only provide their Social Security number if it’s necessary. Protect personal information at home and protect personal computers with anti-spam and anti-virus software. Regularly change passwords for online accounts.

3. Don’t Fall for Scams

Criminals often try to impersonate banks, credit card companies and even the IRS hoping to steal personal data. Learn to recognize and avoid those fake communications. Also, the IRS will not call a taxpayer threatening a lawsuit, arrest or to demand immediate payment. Beware of threatening phone calls from someone claiming to be representing the IRS.

4. Report Tax-Related ID Theft

Here’s what taxpayers should do if they cannot e-file their return because someone already filed under their SSN:

i) File a tax return by paper and pay any taxes owed.

ii) File an IRS Form 14039, Identity Theft Affidavit. Print the form and mail or fax it according to the instructions. Include it with the paper tax return and/or attach a police report describing the theft if available.

iii) File a report with the Federal Trade Commission using the FTC Complaint Assistant.

iv) Contact Social Security Administration at www.ssa.gov and type in “identity theft” in the search box.

v) Contact financial institutions to report the alleged identity theft.   

vi) Contact one of the three credit bureaus so they can place a fraud alert or credit freeze on the affected account.

vii) Check with the applicable state tax agency to see if there are additional steps to take at the state level.

5. IRS Letters

If the IRS identifies a suspicious tax return with a taxpayer’s stolen SSN, that taxpayer may receive a letter asking them verify their identity by calling a special number or visiting an IRS Taxpayer Assistance Center.

6. IP PIN

If a taxpayer is a confirmed ID theft victim, the IRS may issue them an IP PIN. The IP PIN is a unique six-digit number that the taxpayer uses to e-file their tax return. Each year, they will receive an IRS letter with a new IP PIN.

7. Report Suspicious Activity

If taxpayers suspect or know of an individual or business that is committing tax fraud, they can visit IRS.gov and follow the chart on How to Report Suspected Tax Fraud Activity.

8. Service Options

Information about tax-related identity theft is available online. The IRS has a special section on IRS.gov devoted to identity theft and information for victims to obtain assistance.

For more on this Topic, see the Taxpayer Guide to Identity Theft.

Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Additional IRS Resources:

-          Publication 5027, Identity Theft Information for Taxpayers

-          Publication 5199, Tax Preparer Guide to Identity Theft

-          Publication 4524, Security Awareness-Identity Theft Flyer

-          Publication 4523, Beware of Phishing Schemes

-          Tax Topic 101, IRS Services – Volunteer Tax Assistance, Outreach Programs, and Identity Theft

-          IRS Tax Map, Identity Theft

Zaher Fallahi, Tax Attorney, CPA, licensed in California and a Washington D. C., advises clients with international tax matters, represents taxpayers with tax audits, including undisclosed foreign accounts before the Treasury throughout the United States.

Zaher Fallahi, Esq., has been rated 10 out of 10 by Avvo Rated 10 of 10 .

Zaher Fallahi, CPA, Tax Attorney, is ranked a top tax attorney TOP Tax Attorney

About 1.8% of the U.S. lawyers are also CPAs, and we are proudly one of them.

Client Testimonials

Colleague Testimonials

Attorney-Client Privileged Consultation telephone appointments are available for clients with civil cases who cannot meet in person. Please call:

Toll Free 877-687-7558 (Nationwide)

(310) 719-1040 (Los Angeles)

(714) 546-4272 (Orange County)

E-mail taxattorney@zfcpa.com

 If you are a US citizen or a US Green Card Holder, a US person the Internal Revenue Code 7701(b), and live overseas, you are taxed on your worldwide income regardless of where you earned it. You are also subject to all the US international tax laws, including Report of Foreign Bank & Financial Accounts ( FBAR), Foreign Account Tax Compliance Act ( FATCA), among others.

The good news is that under the Foreign Earned Exclusion provided by the Section 911of the Internal Revenue Code, you may be able exclude up to an amount of your overseas compensation that is adjusted annually for inflation ($102,100 for 2017 and $103,900 for 2018), if you otherwise qualify. For example not to stay in the US more than 35 days in a calendar year, subject to exceptions.

Additionally, you may deduct certain foreign housing amounts. Generally, this exclusion can only be claimed if timely (June 15 due date if present overseas, but tax liabilities must be paid by April 15) filing the tax return.  Other rules could apply if entering the OVDP.

It is important to note that this exclusion applies to earned income only and doesn’t apply to un-earned income (see below). Neither does it waive the requirements for filing the FBAR and FATCA (see above).

When to File?

Your 2018 calendar year Form 1040 is generally due April 15, 2019. However, you are automatically granted a 2-month extension of time to file (to June 17, 2019, for a 2018) if, on the due date of your return, you live outside the US and Puerto Rico and your tax home (defined above) is outside the US and Puerto Rico. If you take this extension, you must attach a statement to your return explaining that you meet these two conditions. The automatic 2-month extension also applies to paying the tax. However, you will owe interest on any tax not paid by the regular due date of your return.

Where to File ?

If any of the following situations apply to you: 

   (1)You claim the foreign earned income exclusion,

   (2) You claim the foreign housing exclusion or deduction, or

   (3) Your tax home is in a foreign country or countries throughout your period of bona fide residence or physical presence, whichever applies.

File your return using the appropriate address for your circumstances:

Requesting a refund, or no check or money order enclosed:
Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215
USA

Enclosing a check or money order:
Internal Revenue Service
P.O. Box 1303
Charlotte, NC 28201-1303
USA

Foreign Income Categories 

Generally, the foreign income may be classified to three categories;

(a) Earned Income;

(b) Un-earned Income; and,

(c) Variable Income.

(a) Earned income 

Earned income includes;

(1) Salaries & wages;

(2) Other commissions;

(3) Bonuses;

(4) Professionals fees; and,

(5) Tips.

Not: The exclusion applies to income tax only and not to social security, unless there is a totalization agreement, see http://www.zfcpa.com/blog/ustotalizationagreements

(b) Unearned income

Unearned income includes:

(1) Dividends;

(2) Interest;

(3) Capital gains;

(4) Gambling winnings;

(5) Alimony;

(6) Social security benefits; and

(7) Annuities.

(c)Variable income

Variable income may fall into either one of the above under the circumstances and includes:

(1) Business income;

(2) Royalties; and,

(3) Rents.

Generally, the exclusion may be taken under one of the following tests:

Bona Fide Residence Test

To meet this test, you must be one of the following:

(1) A U.S. citizen who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1st through December 31st, if you file a calendar year return), or

( 2) A U.S. resident alien who is a citizen or national of a country with which the US has an income tax treaty in effect and who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1^st through December 31st, if you file a calendar year return). Whether you are a bona fide resident of a foreign country depends on your intention about the length and nature of your stay. Evidence of your intention may be your words and acts.

 Note:  You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year.

Physical Presence Test

To meet this test, you must be a US citizen or resident alien who is physically present in a foreign country or countries, for at least 330 full days during any period of 12 months in a row. A full day means the 24-hour period that starts at midnight.

To figure 330 full days, add all separate periods you were present in a foreign country during the 12-month period shown on line 16 for IRS Form 2555. The 330 full days can be interrupted by periods when you are traveling over international waters or are otherwise not in a foreign country.  You may review IRS Publication 54 for more information and examples.

Line 16. The 12-month period on which the physical presence test is based must include 365 days, part of which must be in 2018. The dates may begin or end in a calendar year other than 2018.

Zaher Fallahi, Tax Attorney, CPA, licensed in California and a Washington D. C., advises clients with international tax matters, represents taxpayers with tax audits, including undisclosed foreign accounts before the Treasury throughout the United States.

Zaher Fallahi, Esq., has been rated 10 out of 10 by Avvo Rated 10 of 10 .

Zaher Fallahi, CPA, Tax Attorney, is ranked a top tax attorney TOP Tax Attorney

About 1.8% of the U.S. lawyers are also CPAs, and we are proudly one of them.

Client Testimonials

Colleague Testimonials

Attorney-Client Privileged Consultation telephone appointments are available for clients with civil cases who cannot meet in person. Please call:

Toll Free 877-687-7558 (Nationwide)

(310) 719-1040 (Los Angeles)

(714) 546-4272 (Orange County)

E-mail taxattorney@zfcpa.com

WASHINGTON — The IRS announced on January 16, 2018 that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total 2018 tax liability.

 
This the penalty for any taxpayer who paid at least 85% of their total tax liability during the year through tax withholding, estimated tax payments or a combination of the two. The usual threshold to avoid a penalty is 90%.
 
The waiver computation announced today will be integrated into commercially available tax software and reflected in the forthcoming revision of IRS Form 2210.
 
This relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated taxes to reflect the changes under the 2017 New Tax Law called the Tax Cuts and Jobs Act (TCJA). 
 
“We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld,” said IRS Commissioner Chuck Rettig. “We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”
 
The updated federal tax withholding tables, released in early 2018, largely reflected the lower tax rates and the increased standard deduction brought about by the new law. This generally meant some taxpayers had less tax withheld in 2018 and saw more in their paychecks. 
 
However, the withholding tables couldn’t fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions. As a result, some taxpayers could have paid too little tax during 2018, if they did not submit a properly-revised W-4 Form or increase their estimated tax payments. The IRS and partner groups conducted an extensive outreach and education campaign throughout 2018 to encourage taxpayers to do a “Paycheck Checkup” to avoid a situation where they had too much or too little tax withheld when they file their tax returns.  Although most 2018 tax filers are still expected to get refunds, some taxpayers will unexpectedly owe additional tax when they file their returns.
 
Zaher Fallahi, Tax Attorney, CPA, licensed in California and a Washington D. C., represents taxpayers with tax audits, including undisclosed foreign accounts before the Treasury throughout the United States. Telephone appointments are available for clients with civil cases who cannot meet in person.  For an Attorney-Client Privileged Consultation, Call:

(310) 719-1040 (Los Angeles)

(714) 546-4272 (Orange County)

Toll Free 877-687-7558 (Nationwide)

E-mail taxattorney@zfcpa.com

January 7, 2019      Issue Number:    IR-2019-01

WASHINGTON ― Despite the government shutdown, the IRS today confirmed that it will process tax returns beginning January 28, 2019 and provide refunds to taxpayers as scheduled. 

 
“We are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period,” said IRS Commissioner Chuck Rettig. 
 
Congress directed the payment of all tax refunds through a permanent, indefinite appropriation, and the IRS has consistently been of the view that it has authority to pay refunds despite a lapse in annual appropriations. Although in 2011 the Office of Management and Budget (OMB) directed the IRS not to pay refunds during a lapse, OMB has reviewed the relevant law at Treasury’s request and concluded that IRS may pay tax refunds during a lapse.

The IRS will be recalling a significant portion of its workforce, currently furloughed as part of the government shutdown, to work. Additional details for the IRS filing season will be included in an updated FY2019 Lapsed Appropriations Contingency Plan to be released publicly in the coming days. 
 
“IRS employees have been hard at work over the past year to implement the biggest tax law changes the nation has seen in more than 30 years,” said Rettig. 
 
As in previous years, the IRS will begin accepting and processing individual tax returns once the filing season begins. For taxpayers who usually file early in the year and have all of the needed documentation, there is no need to wait to file. They should file when they are ready to submit a complete and accurate tax return. 
 
The filing deadline to submit 2018 tax returns is Monday, April 15, 2019 for most taxpayers.  Because of the Patriots’ Day holiday on April 15 in Maine and Massachusetts and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine or Massachusetts have until April 17, 2019 to file their returns.
 
Software companies and tax professionals will be accepting and preparing tax returns before January 28 and then will submit the returns when the IRS systems open later this month. The IRS strongly encourages people to file their tax returns electronically to minimize errors and for faster refunds.

Zaher Fallahi, CPA, Tax Attorney, licensed in California and a Washington D. C., represents taxpayers with undisclosed foreign accounts before the Treasury throughout the United States. Telephone appointments are available for clients with civil cases who cannot meet in person.  

For an Attorney-Client Privileged Consultation, Call:

(310) 719-1040 (Los Angeles)

(714) 546-4272 (Orange County)

Toll Free 877-687-7558 (Nationwide)

E-mail taxattorney@zfcpa.com

IRS provided

Frequently Asked Questions (FAQ)

§ 199A Deduction for Qualified Business Income (QBI)

Basic questions and answers on new 20% deduction for pass-through businesses

Below are answers to some basic questions about the new 20% deduction for pass-through businesses. Also known as the section 199A deduction or the deduction for qualified business income, the deduction was created by the 2017 Tax Cuts and Jobs Act.

Q1. What is the Deduction for Qualified Business Income?

A1. Section 199A of the Internal Revenue Code provides many taxpayers a deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity. The deduction has two components.

(1) Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
 

(2) Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.

The sum of these two amounts is referred to as the combined qualified business income amount. Generally, this deduction is the lesser of the combined qualified business income amount and an amount equal to 20 percent of the taxable income minus the taxpayer’s net capital gain. For details on figuring the deduction, see Q&A 6 and 7. The deduction is available for taxable years beginning after Dec. 31, 2017. Most eligible taxpayers will be able to claim it for the first time when they file their 2018 federal income tax return in 2019. The deduction is available, regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.

Q2. Who may take the section 199A deduction?

A2. Individuals, trusts and estates with qualified business income, qualified REIT dividends or qualified PTP income may qualify for the deduction. In some cases, patrons of horticultural or agricultural cooperatives may be required to reduce their deduction. The IRS will be issuing separate guidance for co-ops.

Q3. How do S corporations and partnerships handle the deduction?

A3. S corporations and partnerships are generally not taxpayers and cannot take the deduction themselves. However, all S corporations and partnerships report each shareholder’s or partner’s share of QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends and qualified PTP income on Schedule K-1 so the shareholders or partners may determine their deduction.

Q4. What is qualified business income (QBI)?

A4. QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded.

Q5. What is a qualified trade or business?

A5. A qualified trade or business is any trade or business, with two exceptions:

(1) Specified service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers
 

(2) Performing services as an employee

Q6. How is the deduction for qualified business income computed?

A6. The SSTB limitation discussed in Q&A 5 does not apply if a taxpayer’s taxable income is below $315,000 for a married couple filing a joint return and $157,500 for all other taxpayers; the deduction is the lesser of:

       A) 20 percent of the taxpayer’s QBI, plus 20 percent of the taxpayer’s qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income

     B) 20 percent of the taxpayer’s taxable income minus net capital gains.

If the taxpayer’s taxable income is above the $315,000/$157,500 thresholds, the deduction may be limited based on whether the business is an SSTB, the W-2 wages paid by the business and the unadjusted basis of certain property used by the business. These limitations are phased in for joint filers with taxable income between $315,000 and $415,000, and all other taxpayers with taxable income between $157,500 and $207,500. The threshold amounts and phase-in range are for tax-year 2018 and will be adjusted for inflation in subsequent years.

Q7. I have income from a specified service trade or business. How does that affect my deduction?

A7. The SSTB limitation does not apply to any taxpayer whose taxable income is below the $315,000/$157,500 threshold amounts discussed in Q&A #6. For taxpayers whose taxable income is within the phase-in range discussed in Q&A #6, the taxpayer’s share of QBI, W-2 wages and UBIA of qualified property related to the SSTB may be limited. If the taxpayer’s taxable income exceeds the phase-in range, no deduction is allowed with respect to any SSTB. The threshold amounts and phase-in range are for tax year 2018 and will be adjusted for inflation in subsequent years.

Q8. In 2018, I will report taxable income under $315,000 and file married filing jointly. Do I have to determine if I am in an SSTB in order to take the deduction? Is there any limitation on my deduction?

A8. No, if your 2018 taxable income is below $315,000, if married filing jointly, or $157,500 for all other filing statuses, it doesn’t matter what type of business you are in. You will be able to deduct the lesser of:

a) Twenty percent (20%) of your QBI, plus 20 percent of your qualified REIT dividends and qualified PTP income, or

b) Twenty percent (20%) of your taxable income minus your net capital gains.

Q9. In 2018, I will report taxable income between $157,500 and $207,500 and file as single. I receive QBI. Does it matter if it is from an SSTB?

A9. Yes, because your taxable income is above the threshold amount, your section 199A deduction with respect to any SSTB will be limited. However, because you are within the phase-in range, you may be allowed some section 199A deduction with respect to an SSTB. In addition, for taxpayers above the threshold amount, the section 199A deduction with respect to any trade or business, including an SSTB, may be limited by the amount of W-2 wages paid by the trade or business and the UBIA of qualified property held by the trade or business. The phase-in range is $315,000 to $415,000 for joint filers and $157,500 to $207,500 for all other filing statuses. Section 1.199A-1 of the proposed regulations provides additional information.

Q10. In 2018, I am single and will report taxable income over $207,500. My only income is from an SSTB. Am I entitled to the deduction with respect to the SSTB?

A10. No. The same is true for a married couple filing a joint return whose taxable income exceeds $415,000. However, you may be entitled to a deduction for QBI earned from another trade or business that is not an SSTB or from qualified REIT dividends or qualified PTP income.

Q11. In 2018, I am single and will report taxable income over $207,500. I am NOT in an SSTB.  Am I entitled to the deduction?

A11. Yes, if you have QBI, qualified REIT dividends or qualified PTP income. For eligible taxpayers with total taxable income in 2018 over $207,500 ($415,000 for married filing joint returns), the deduction for QBI may be limited by the amount of W-2 wages paid by the qualified trade or business and the UBIA of qualified property held by the trade or business. The proposed rules provide additional information on these limitations. The IRS also issued a notice of proposed revenue procedure providing methods for determining W-2 wages for purposes of the limitation.

Q12. How do co-ops qualify for the 199A deduction?

A12. The IRS will be issuing separate guidance for co-ops.

Zaher Fallahi, CPA, Tax Attorney, advises taxpayers including Americans Living Abroad, in resolving their tax problems, and Offshore Accounts (OVDP, FBAR, FATCA). Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail taxattorney@zfcpa.com

IRS Tips on Income Taxes and Selling a Home

Homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home. Below are tips to keep in mind when selling a home:

Ownership and Use

To claim the exclusion, the homeowner must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:

1- Owned the home for at least two years  

2- Lived in the home as their main home for at least two years.

3- Gain. If there is a gain from the sale of their main home, the homeowner may be able to exclude up to $250,000 of the gain from income or $500,000 on a joint return in most cases. Homeowners who can exclude all of the gain do not need to report the sale on their tax return.

4- Loss. A main home that sells for lower than purchased is not deductible.

Reporting a Sale

Reporting the sale of a home on a tax return is required if all or part of the gain is not excludable. A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.

Possible Exceptions

There are exceptions to the rules above for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others. More information is available in Publication 523, Selling Your Home.

Worksheets

Worksheets are included in Publication 523, Selling Your Home, to help you figure the:

1- Adjusted basis of the home sold

2- Gain (or loss) on the sale

3- Gain that can be excluded

Items to Keep In Mind:

1- Taxpayers who own more than one home can only exclude the gain on the sale of their main home. Taxes must paid on the gain from selling any other home.

2- Taxpayers who used the first time homebuyer credit to purchase their home have special rules that apply to the sale. For more on those rules, see Publication 523. Use the First Time Homebuyer Credit Account looks-up to get account information such as the total amount of your credit or your repayment amount.

3- Work-related moving expenses might be deductible, see Publication 521, Moving Expenses.

4- Taxpayers moving after the sale of their home should update their address with the IRS and the U.S. Postal Service by filing Form 8822, Change of Address.

5- Taxpayers who purchased health coverage through the Health Insurance should notify the Marketplace when moving out of the area covered by the current Marketplace plan.

Avoid scams

The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can  view their tax account information on IRS.gov to find 

Zaher Fallahi, CPA, Tax Attorney, assist taxpayers including Americans Living Abroad, in resolving their tax problems and undisclosed foreign bank accounts; FBAR, FATCA and Offshore Voluntary Disclosure Program (OVDP).  Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail taxattorney@zfcpa.com

IRS Helpful Tips About Gambling Winnings and Losses

Taxpayers must report all gambling winnings as income and must be able to itemize deductions to claim any gambling losses on their tax return. Here are the helpful IRS tips for taxpayers who gamble to know:

Gambling income

Income from gambling includes winnings from the:

(a) lottery

(b) horseracing

(c) casinos and

(d)  Cash and non-cash prizes. Taxpayers must report the fair market value of non-cash prizes like cars and trips to the IRS.

Payer tax form

The payer may issue a Form W-2G, Certain Gambling Winnings, to winning taxpayers based on the type of gambling, the amount they win and other factors. The payer also sends a copy of the form to the IRS. Taxpayers should also get a Form W-2G if the payer withholds income tax from their winnings.

How to report winnings

Taxpayers must report all gambling winnings as income and they normally should report all gambling winnings for the year on their tax return as “Other Income.” This is true even if the taxpayer doesn’t get a Form W-2G.

How to deduct losses

Taxpayers are able to deduct gambling losses on Schedule A, Itemized Deductions, but keep in mind, they can’t deduct gambling losses in excess of their winnings.

Keep gambling receipts

Keep records of gambling wins and losses. This means gambling receipts, statements and tickets or by using a gambling log or diary.

Zaher Fallahi, CPA, Tax attorney, advises taxpayers including Americans-living abroad, with their taxes, IRS representation, foreign accounts (FBAR, FATCA, OVDP). Telephones (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail to:  taxattorney@zfcpa.com