California Specific!

Tax Update will come as a surprise to many Californians.

California has announced that even though the IRS will no longer be imposing health insurance based penalties, California will. Starting in January 2020, all Californians are required to have minimum essential health coverage.
Just like the expired IRS regulations, California is imposing penalties for noncompliance and a possible tax credit for those who go through the Covered California to obtain their insurance.

Don’t forget to track your expenses!

Many people who generally itemized their deductions in the past were not able to in 2018 due to IRS increasing the standard deductions amounts as well as disallowing many deductions. California is still allowing many of the deductions the IRS has disallowed and is also allowing us to itemize CA deductions even when you do not itemize for IRS.

RETRO-ACTIVE tax extenders and new tax laws.  715 pages.  Here are some highlights.


  • In prior years, we were allowed to deduct medical expenses that exceeded 7.5% of our adjusted gross income, if we itemized.  Tax law changes happen every year and a couple of years ago, they changed the 7.5% floor to 10% floor.  So, when you filed your 2018 tax return, if you itemized medical expenses, you were only allowed to itemize any amount that was over 10% of your adjusted gross income.  It’s been reverted, retroactively, back to 7.5% for tax years 2017 and 2018 through 2020.  What this means, is that a very few people will have enough medical expenses to make it worth itemizing.  If you think you fall into this category, let me know and we can check to see if it would be worth the time and money to amend your returns.

  • They also took away, and then gave back the mortgage insurance premium deduction.  Certain mortgages are required to have MIP.  For 2018, they took it away, but at the end of December 2019 they gave it back, retroactively, for tax years 2017 through 2020.  If you itemize and paid MIP, you may want to consider amending prior year returns.  For most people, this deduction alone will not make it worth your effort to amend the tax return.  But if you are amending anyway for another reason, you may as well add this if it applies.

  • If you defaulted on your mortgage that you took out to “buy, build or substantially improve your main home” you were able to exclude from income cancelled debt on your “qualified principal residence”.  They took this away in 2017, but it’s back now!  This one is a big deal.

  • WE DID NOT GET BACK the un-reimbursed employee expenses deduction!  Boo!  This one was huge.  This was mileage, uniforms and union dues (to name a just few).  Losing this particular deduction made it so that many folks who itemized are now better off taking the standard deduction.  CALIFORNIA still allows these deductions, so be sure to track them if you are in CA, or another state that allows them.  


Tax Reform, Deeper Dive into The Standard Deduction and Personal Exemption

This is an extension of the prior blog, Tax Reform, The Basics – Individual.   

What I want to concentrate on are some examples of how this will play out for Regular Joe.  None of these scenarios consider itemized deductions.       

The standard deduction has almost doubled, and the personal exemption is repealed.  What does this mean?  Well, it means that a lot of people who have itemized in the past will not be doing so any longer, at least not until 2025 when these provisions are set to expire. 

The standard deduction has almost doubled.  For Singles, this is now $12,000.  For Heads of Household, the amount is now $18,000 and for Married couples filing a joint tax return, the standard deduction is now $24,000.     

This is disguised as a good thing.  And in some cases, it is.  But with the repeal of the personal exemption, it basically depends on your situation as to if this is good or bad.    

Here are some real-world examples: 

Scenario #1)   

This couple is Married and Filing Jointly.  They have three qualifying dependent children.   

Based on 2017 tax law, this family would have a standard deduction of $12,700 and personal exemptions of $4050 for each member of the family.  $12,700 Standard Deduction plus $20,250 Personal Exemptions ($4050 X 5 members of the family) would equal $32,950 of ordinary income this family could earn before any income tax liability would be incurred.  (Keep in mind that I am referring to wage earners and not the self-employed.)  Based on 2018 tax law, the Standard Deduction is $24,000 and there is no personal exemption.  This family can earn $24,000 before any tax liability is incurred.  Taxable income increases by $8,950.00.  Scenario #1 sucks.  

Scenario #2) 

This couple is also married, but they have no dependents. 

Based on 2017 tax law, this couple would have a standard deduction of $12,700 and a personal exemption of $4050 each.  $12,700 plus $9000 ($4050 X 2) equals $21,700 of income they could have earned in 2017 before incurring a tax liability.  Based on 2018 tax law, the Standard Deduction is $24,000 and there is no personal exemption.  This family can earn $24,000 before any tax liability is incurred.  Scenario #2 reduces the taxable income by $2,300 for this couple.  Good stuff! 

Scenario #3) 

We have a single taxpayer with one qualifying dependent. 

Based on 2017 law, this family would have a standard deduction of $9350 and personal exemptions of $9000 ($4050 X2) totaling $18,350 of income they could have earned in 2017 before incurring a tax liability.  Based on 2018 law, this family is allowed a standard deduction of $18,000 but no exemptions.  One of the rules for claiming a filing status of Head of Household is that you MUST have a qualifying dependent.  This filing status does not come out on top.  In 2018, this family can earn $18,000 before income tax liability is incurred.    Scenario #3 not great, but $350 of additional taxable income is not so bad…   

Scenario #4) 

Here is a Single taxpayer with no dependents. 

Based on 2017 law, this taxpayer would have had a standard deduction of $6350 and a personal exemption of $4050 totaling $10,400.  2018 tax law says this tax payer now has a standard deduction of $12,000.  This Individual can earn up to $12,000 without incurring any tax liability.  Scenario #4 reduces the taxable income by $1,600.  Pretty good deal! 

In these scenarios, I have not considered credits.  Credits reduce tax dollar for dollar.  Meaning that if your taxable income creates an income tax liability, the credit will reduce that liability dollar for dollar.    

Tax Reform has increased the Child Tax Credit and created a new credit, Credit for Other Dependents. 

The Child Tax Credit has been improved. doubling the basic amount and increasing the amount that is refundable.  There are income and age limits.  The income limits have been expanded, a lot more people will qualify for the Child Tax Credit.  Income phase outs begin at $200,000 for individuals and $400,000 for Married Filing Jointly.  Dependents must be under 17 years old on the last day of the year to be qualifying dependents.   

The Credit for Other Dependents of up to $500 is available for each of your dependents who do not qualify for the child tax credit.  This credit begins to phase out at $200,000 ($400,000 if married filing jointly). 

Let’s look at Scenario #1 again.   

Due to Tax Reform, in 2018, this family has $8950.00 more in taxable income than they had in 2017.  If they are in the lowest tax bracket, meaning their taxable income is below $9526.00, tax on the additional $8950 would = $895.  If all three dependents are qualifying children (16 years old or younger on the last day of the year) this family is looking at a potential of $6000 in Child Tax Credit (CTC) which would reduce that $895 dollar for dollar to zero and potentially qualify for a refund of $4200 for the refundable amount.  ($6000 CTC – $895 tax = $5105.  Of $5105, $4200 is refundable {$1400 each qualifying dependent under age 17}).  Maybe scenario 1 doesn’t suck so bad after all. 

Now I’m going to sound like an infomercial.   

EVERYBODY, I know you think we’re done with this topic, BUT WAIT! 

It was great, back in February the IRS updated the withholding tables that your employers use to withhold taxes from your paychecks.  Your paychecks probably got a little larger due to having less tax withheld.    

This seemed great at the time.  But think about Scenario #1 again.  Due to losing the exemption deduction, the family in scenario 1 has more taxable income.  Due to the updated withholding tables, this family had less withheld in federal income tax from their paychecks.   Higher taxable income but lower tax withholding.  Maybe it’ll work itself out…? 

“The IRS encourages several key groups of taxpayers to perform a “paycheck checkup” to check if they are having their employer withhold the right amount of tax for their situation, following recent tax-law changes. It’s especially important for certain people, to check their withholding. They are people who: 

  • Belong to a two-income family. 
  • Work two or more jobs or only work for part of the year. 
  • Have children and claim credits such as the Child Tax Credit. 
  • Have older dependents, including children age 17 or older. 
  • Itemized deductions on their 2017 tax returns. 
  • Earn high incomes and have more complex tax returns. 
  • Received large tax refunds or had large tax bills for 2017.”  personal comment.. Who doesn’t fall into one of these categories?!? 

These links will help you to understand if you have had enough withheld from your paychecks.  

 The YouTube video was published by the IRS to assist taxpayers in using the IRS withholding calculator to make sure taxpayers have enough withholding.  

If this is confusing, or you just don’t want to review these links but think you may be in one of the categories bullet marked above, I am offering a paycheck withholding checkup for $75.   This offer does not include business returns.  There is a separate offer for Business clients, price dependent on the type and complexity of your business returns.   Please contact me or schedule an appointment if you are interested.   

Tax Reform, The Basics – Individuals

The Tax Cuts and Jobs Act is over 1,100 pages long and impacts both businesses and individuals.  Today, I am going to concentrate on the Basics as they pertain to the Individual Tax Payer.  Not to worry, though.  I will be taking a deeper dive into several provisions of the Tax Cuts and Jobs Act through out the summer, and if you are interested in particular aspects of the Act, please comment and I will go there.

As you can imagine, with over 1100 pages, this was a very long and confusing read!  Here, check it out for yourself.

With so many changes, where should I start?  Well, the Tax Cuts and Jobs Act (TCJA) also known as the 2018 Tax Reform starts with tax brackets, so let’s start there.

Simply put, all across the board, tax rates are down.

Single and Married Filing Separately
2017 2018
10% 10%
Income up to $9,525 Income up to $9,525
15% 12%
Over $9,525 to $38,700 Over $9,525 to $38,700
25% 22%
Over $38,700 to $93,700 Over $38,700 to $82,500
28% 24%
Over $93,700 to $195,450 Over $82,500 to $157,500
33% 32%
Over $195,450 to $424,950 Over $157,500 to $200,000
35% 35%
Over $424,950 to $426,700 Over $200,000 to $500,000
39.60% 37%
Over $426,700 Over $500,000
Head of Household
2017 2018
10% 10%
Up to $13,600 Up to $13,600
15% 12%
Over $13,600 to $51,850 Over $13,600 to $51,800
25% 22%
Over $51,850 to $133,850 Over $51,800 to $82,500
28% 24%
Over $133,850 to $216,700 Over $82,500 to $157,500
33% 32%
Over $216,700 to $424,950 Over $157,500 to $200,000
35% 35%
Over $424,950 to $453,350 Over $200,000 to $500,000
39.60% 37%
Over $453,350 Over $500,000
Married Filing Joint & Surviving Spouses
2017 2018
10% 10%
Up to $19,050 Up to $19,050
15% 12%
Over $19,050 to $77,400 Over $19,050 to $77,400
25% 22%
Over $77,400 to $156,150 Over $77,400 to $165,000
28% 24%
Over $156,150 to $237,950 Over $165,000 to $315,000
33% 32%
Over $237,950 to $424,950 Over $315,000 to $400,000
35% 35%
Over $424,950 to $480,050 Over $400,000 to $600,000
39.60% 37%
Over $480,050 Over $600,000

I created these charts based on the information in the link provided above.  I understand that this may be confusing, so be sure to check out my Summer Blog Series which will dive deeper into tax brackets, including real world examples.  For now, understand that most everybody is in a lower tax bracket.

The next provision of the Act pertains to pass-through businesses and since I am focusing on the Individual in this blog rather than the business, I will skip past that for now.  Rest assured that I have a blog planned that will go into great detail on the 20% DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS-THRU ENTITIES. 

So, back to the Individual! 

I am sure you have probably heard that the standard deduction has doubled and that the personal exemption is repealed.  But what does this mean? Well, it means that a lot of people who have itemized in the past will not be doing so any longer, at least not until 2025 when these provisions are set to “sunset” or expire.  Why will a lot of people no longer be itemizing their deductions?  Well, that is because you can take EITHER the Standard Deduction OR you can Itemize your deductions and with the increased amount of the Standard Deduction, most people simply will not have enough itemized deductions to beat the Standard.

The standard deduction has almost doubled.  For Singles, this is now $12,000, up from $6350.  For Heads of Household, the amount is now $18,000, up from $9350.  For Married couples filing a joint tax return, the standard deduction is now $24,000, up from $12,700.  Not quite doubled…

This is disguised as a good thing.  And in some cases, it is.  But with the repeal of the personal exemption, it basically depends on your situation and your filing status as to if this is good or bad.   My very next blog (already written) will go into detail, giving real world examples.

More good things for families!  The Child Tax Credit has been modified in a couple of ways.  First, and most exciting, is the amount of the credit has increased from $1,000 to $2,000 per child.  There are some rules as to who can claim the Child Tax Credit, such as age and income limitations.  This credit reduces tax and once tax is reduced to zero, up to $1,400 of any remaining amount (per child) of the credit is refundable. 

There is also a NEW CREDIT for families.   We now have a nonrefundable $500 family credit for “other dependents” such as an aging parent who depends on you for care or for your child who is over 17.

Huge changes for itemized deductions! 

You’ve probably heard of the SALT limitations by now.

State And Local Tax deductions were previously basically unlimited, and here in CA, that was a very good thing.   Now, though, we are limited to a total of $10,000 deduction for all combined state and local taxes.  This includes income and property taxes.  California has among the highest taxes in the nation. CA’s base sales tax rate of 7.25% is higher than that of any other state, and its top marginal income tax rate of 13.3% is the highest state income tax rate in the country.  This means that in CA, we commonly exceed $10,000 in state and local taxes.  This is a huge deal for Californians!  More to come on this subject.

More on itemized deductions!  The mortgage interest deduction has significantly changed.  Prior to 2018, you could deduct your mortgage interest up to $1Million in debt.  Now, you can only deduct the interest on the first $750,000 that you borrow.  Existing loan debt will be grandfathered in, the lower deduction applies only to loans that are taken out after December 15th, 2017.  First and second homes are still allowed, but the $750,000 limit is a combined limit.  AND home equity lines of credit are no longer a go UNLESS (yes, there is a loophole)…  Prior to 2018, you were allowed to deduct interest on home equity loans and lines of credit up to $100,000.  Beginning in 2018, this is generally no longer allowed.

Here is our exception.  Home equity loans and lines of credit have been traditionally used to pay all kinds of expenses, such as paying off automobile loans or credit card debt, or just spent on… Those are no longer allowed.  However, if the loan proceeds are used to build or improve your main home, the proceeds are considered acquisition debt and allowable, so go ahead and take out that loan for the new roof.  However, you are still subject to the $750,000 combined loan limitations.

You also may have heard about charitable contribution limits going up.  Prior to 2018, we were allowed to contribute and deduct up to 50% of our income.  Now we can donate and deduct up to 60% of our income.  However, most people do not come anywhere near this limit so this is all I am going to say about this.

The other really big deal on itemized deductions is in the miscellaneous itemized deductions that have been subject to what is known as the 2% Floor. 

What this means is that, in the past, the IRS has allowed us to write off certain expenses that exceed 2% of your adjusted gross income, and the amount below 2% of your AGI was just forfeit. 

These miscellaneous itemized deductions include things like unreimbursed employee business expense, tax preparation fees, union dues, home office expense, work related travel (MILEAGE!!!!), that safety deposit box you like to deduct and hobby expenses are just a few of the more common miscellaneous deductions that have been subject to the 2% floor. 

The Act has removed these deductions.  You will no longer be able to deduct mileage as an unreimbursed employee business expense.  Don’t bother tracking it. (THIS DOES NOT INCLUDE SELF EMPLOYED, these expenses are still deductible to your business.)

Alright, that’s it for today.  I am offering a withholding checkup for $75.00.  If you are a wage earner and are not sure if your employer is withholding enough in federal or state income taxes, or if you are a retiree who is concerned about withholding or estimated taxes, feel free to contact me for a withholding checkup.  (Does not apply to self-employed, schedule C or schedule E clients.  There will be a different checkup offered for small business clients soon.)

Earned Income Tax Credit


Businesses are beginning to issue W2 forms to their employees.  Most people should receive all of their W2 forms no later than January 31st.  Once you receive your tax documents, it is a great idea to schedule your appointment to get your tax return prepared.  Late January and Early February are very busy times in tax offices around the nation, so the earlier you can schedule your appointment during the busy part of the season the better!

The Earned Income Tax Credit (EITC) is a federal tax credit for low- and moderate-income working people.  It encourages and rewards work as well as offsets federal payroll and income taxes.

Twenty-nine states plus the District of Columbia have established state EITCs. State EITCs build on the benefits of the federal EITCs and each state has it’s own set of qualifications.

The EITC is one of the most utilized tax credits.  *Nationwide during 2017, more than 25.8 million eligible workers and families received about $63.8 billion in EITC.  The average amount of EITC received nationwide was about $2,470.00. 


Here are some facts about the Federal Earned Income Credit 


It is the law that the IRS cannot issue refunds claiming the Earned Income Tax Credit or the Additional Child Tax Credit before mid-February. The IRS will process those returns when but will not issue the related refunds before mid-February.   The soonest you will see these types of refunds is February 27th, but only if you have your refund direct deposited into your bank account.

*In CA alone, there were 2.9 Million claims totaling $6.8 Billion dollars with an average claim of $2739.00. 

You do not need to have children in order to qualify for the EITC.

You must have EARNED income.  

*There are two ways to get Earned Income:  

You work for someone who pays you or You own or run a business or farm.

Examples of Income that are Not Earned Income: 

  • Pay received for work while an inmate in a penal institution 
  • Interest and dividends 
  • Retirement income 
  • Social security 
  • Unemployment benefits 
  • Alimony 
  • Child support 

 *The maximum amount of credit for Tax Year 2017 is: 

  • $6,318 with three or more qualifying children 
  • $5,616 with two qualifying children 
  • $3,400 with one qualifying child 
  • $510 with no qualifying children 

For tax year 2017, the maximum amount of Earned Income and your Adjusted Gross Income must both be less than…  

If filing… Qualifying Children Claimed
Zero One Two Three or more
Single, Head of Household or Widowed $15,010 $39,617 $45,007 $48,340
Married Filing Jointly $20,600 $45,207 $50,597 $53,930




To Itemize or not to itemize?

Image result for itemize


Are you confused about itemizing your tax deductions?  You are not alone.  I’d like to break down some basics.

The Internal Revenue Service (IRS) allows you to deduct from income EITHER a Standard Deduction OR your Itemized Deductions.   In most cases you can choose to take which ever deduction gives you the best result on your tax return.

The Standard Deduction for single taxpayers and married couples filing separately is $6,350 in 2017, for married couples filing jointly, the standard deduction is $12,700, and for heads of households, the standard deduction is $9,350, there is also an additional standard deduction for individuals who are blind or age 65 or over.  The standard deduction for a taxpayer who can be claimed as a dependent by another taxpayer cannot exceed the greater of (a) $1,050 or (b) $350 + the dependent’s earned income.

The goal of Itemizing is to beat the Standard Deduction.  If you have qualified Itemized deductions that add up to more than the Standard Deduction, then you would subtract your itemized deductions from your income instead of subtracting the Standard Deduction.  This is done by using Schedule A and entering the calculated amount on the appropriate line of your tax return.

Qualified Itemized Deductions include most taxes you have paid, for example real estate taxes, foreign taxes EITHER state and local income tax or sales tax (whichever is higher) personal property taxes as well as mortgage interest and points from refinancing, charitable contributions, qualified medical expenses that exceed 7.5% of your income, casualty and theft losses, qualified job expenses and other specific investment or miscellaneous expenses.

Under certain circumstances, your itemized deductions may be limited.  This can happen when your income exceeds certain limits or in cases where AMT apply.

All in all, while most Americans do use the Standard Deduction, it is worth looking to see if Itemizing would be a benefit for you.  For many it is.  If you have a high interest rate on your mortgage or expensive medical bills, itemizing may be for you.  High wage earners may pay a lot in state and local income taxes, this often is enough to make itemizing the best option.  Perhaps you sold your home and CA required state withholding.  This is another example where taxes can be enough to tip the scale towards itemizing.

Beginning tax year 2018 (this will affect you when you file your taxes in 2019), President Trumps “Tax Cuts and Jobs Act” will make significant changes to the way we itemize our deductions.   The standard deduction almost doubles, and your personal exemptions go away.  Several allowable itemized deductions are eliminated or capped.     My next blog will go over some of the most significant changes that we will be faced with.

A list of your rights as a taxpayer and IRS obligations to protect them can be found in IRS Publication 1, Your Rights as a Taxpayer.  Here is a link.   It includes #3, The Right to Pay No More than the Correct Amount of Tax.


Morgan Stanley: “You must pay taxes. But there’s no law that says you gotta leave a tip.”