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Just hours before government funding was set to expire, President Trump on March 23 signed the bipartisan Consolidated Appropriations Act, 2018, averting a government shutdown. The $1.3 trillion fiscal year 2018 omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions and increased IRS funding.

The House approved the spending bill by a 256-to-167 vote on March 22. The Senate cleared the measure by a 65-to-32 vote.

Grain Glitch
The so-called "grain glitch" addressed within the omnibus package aims to fix an unintended consequence in the "pass-through" income deduction. The deduction is provided in new Code Sec. 199A, which was enacted last December as part of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

Before the fix, grain and other agricultural products sold to cooperatives received a tax advantage because those sales were deductible from a farmer’s gross sales. Sales to companies other than cooperatives were deductible only from net business income. The inadvertent advantage had been given to cooperatives as part of a drafting error, according to several Republican lawmakers.

The appropriations bill repeals the provision in Code Sec. 199A that allowed farmers to deduct 20 percent of their gross sales to cooperatives. As modified, the deduction is now limited to 20 percent of farmers’ net income, excluding capital gains. "This legislation restores the competitive balance in the agricultural marketplace by leveling the tax burden on independent and cooperative farming businesses," Sen. Jerry Moran, R-Kan., said in a March 22 statement. The bill also modifies the deduction that is allowed to agricultural or horticultural cooperatives.

Low-Income Housing Tax Credit
Although Democrats have previously expressed an unwillingness to help Republicans correct issues within the new tax law, the parties agreed to the grain glitch fix in exchange for an expansion of the low-income house tax credit. The expansion is also included in the spending bill.

"This is the first increase in over a decade," Sen. Maria Cantwell, D-Wa., said on March 22. "Nearly $3 billion is a good start towards tackling the housing crisis in our cities and rural communities," she added. Cantwell spearheaded the efforts among Democrats for the credit’s expansion.

Technical Corrections
Numerous other technical corrections to previous tax bills spanning from 2004-2016 were included in the spending bill, none of which specifically address the TCJA. Included among the fixes are technical corrections to the partnership audit rules.

IRS Funding
The legislation provides the IRS with $11.43 billion in funding, close to $196 million more than currently enacted levels. $320 million is allocated specifically for implementation of the TCJA. The Trump administration had requested $397 million for implementation of the new tax law. According to Treasury Secretary Steven Mnuchin, the increased resources would provide an update to antiquated telephone systems and technology.

White House
President Trump rattled Capitol Hill on March 23 when he announced just hours before government funding was set to expire that he may not sign the government spending bill. Although Mick Mulvaney, Director of the Office of Management and Budget (OMB) said on March 22 that the President would sign the omnibus package, President Trump took to Twitter on March 23 to suggest otherwise. "I am considering a veto of the omnibus spending bill…," Trump said in a tweet.

While Trump did, in fact, wind up signing the spending bill, which tops 2,200 pages, he told reporters at the White House that he was "unhappy" to do so. Trump criticized the $1.3 trillion omnibus package for being the second largest in history. "I say to Congress, I will never sign another bill like this again. I’m not going to do it again. Nobody read it. It’s only hours old," Trump said.

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The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

New Deduction
The Tax Cuts and Jobs Act created Code Sec. 199A. The deduction is temporary and begins this year.

Generally, qualified taxpayers may deduct up to 20 percent of domestic QBI from a partnership, S corporation or sole proprietorship. Congress put in place a limitation based on wages paid, or on wages paid plus a capital element, among other requirements. Certain service trades or businesses generally may not take advantage of the deduction but there are exceptions.

Almost immediately after passage of the new tax law, the AICPA and other tax professional groups urged on the IRS to move quickly on guidance. Recently, the National Society of Accountants (NSA) reported that the IRS would issue guidance on Code Sec. 199A this summer.

Immediate Concern
The AICPA identified several areas of immediate concern. They are:

Definition of Code Sec. 199A qualified business income.
Aggregation method for calculation of QBI of pass-through businesses.
Deductible amount of QBI for a pass-through entity with business in net loss.
Qualification of wages paid by an employee leasing company.
Application of Code Sec. 199A to an owner of a fiscal year pass-through entity ending in 2018.
Availability of deduction for Electing Small Business Trusts (ESBTs).

Services
The AICPA asked the IRS to describe what activities are included in the definition of a services trade or business. "The guidance should clarify that the definition of the term ‘accounting services’ includes any services associated with the determination of tax liabilities including preparation, tax planning, cost segregation services, services rendered with respect to tax credits and deductions, and similar consultative services,"the AICPA told the Service.

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A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done."

A Ways and Means spokesperson told Wolters Kluwer on March 15 that "there are opportunities in making individual tax cuts permanent, increasing innovation, [and] encouraging household savings."Confirmation that House GOP tax writers are mulling additional tax changes to the tax code comes just days after President Trump announced that he and House Republicans are very serious about working on a “phase-two” of tax reform. Trump quipped that Brady is the "king of tax cuts."

Individual Tax Cuts
Among expected changes, in particular, the temporary individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) could be made permanent, a Ways and Means spokesperson told Wolters Kluwer. For budgetary reasons, the cuts to individual tax rates and benefits were not made permanent under the new law. "While the tax cuts for families were long-term, they are not yet permanent, so we’re going to address issues like that," Brady said.

Criticism
Democratic lawmakers remain largely united in their criticisms of the TCJA. House Minority Leader Nancy Pelosi, D-Calif., criticized the new tax law in a March 15 news conference for "giving 83 percent of the benefits to the top 1 percent, ultimately raising taxes for 86 million middle-class families while contending that it's a middle-class tax cut."

To that end, across the U.S. Capitol, Senate Minority Leader Charles E. Schumer has said Democrats would be reluctant to work with Republicans in making any fixes to the new tax law unless Republicans would be willing to address Democrats’ concerns with the law, as well. "We don't have much of an inclination, unless they want to open up other parts of the tax bill that we think need changes, to just help them clean up the mess they made," Schumer said.

Looking Forward
"Mainstream optimism is at record levels, our economy is really gaining momentum and booming in a big way," Brady said. "We’re always looking to improve the tax code," he said, adding that lawmakers are currently considering new ideas for tax reform. "We think there are some good ones." Lawmakers will not combine additional tax reform measures with technical corrections to the existing TCJA, according to Brady, emphasizing that any significant changes to come will be new ideas.

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The House Ways and Means Tax Policy Subcommittee held a March 14 hearing in which lawmakers and stakeholders examined the future of various temporary tax extenders post-tax reform. Over 30 tax breaks, which included energy and fuel credits, among others, were retroactively extended for the 2017 tax year in the Bipartisan Budget Act ( P.L. 115-123) enacted in February.

Both Republican and Democratic lawmakers have varying views on specific temporary tax provisions, but in general, seem to have largely been in agreement that year-end tax extenders are not good policy. New to the discussion, however, is whether such provisions are worthwhile now that business tax rates have been lowered along with full and immediate expensing under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

New Path Forward
The Ways and Means Committee is "charting a new path forward on temporary tax provisions,"Chairman Kevin Brady, R-Tex., said in his opening statement. "Temporary measures are rarely good tax policy."

According to Brady, numerous tax extenders only exist because of the previously outdated tax code and high tax rates. But now that tax reform has been enacted, these temporary tax breaks may serve less of a purpose. "Starting now, we’re going to apply a rigorous test to these temporary provisions,"Brady said.

To that end, Tax Policy Subcommittee Chairman Vern Buchanan, R-Fla., said that any temporary tax provision determined as no longer necessary post-tax reform should be eliminated. And, as for those that continue to serve an important role and enhance tax reform, permanence should be considered.

Tax Policy Subcommittee ranking member Lloyd Doggett, D-Tex., also weighing in on the issue, said that any temporary tax provisions that will remain need to be paid for moving forward. Additionally, Doggett criticized Republicans for not holding enough hearings on the TCJA, as well as the specific tax extenders currently under review. Doing so, he added, would enable needed discussion on relevancy as well as pay-fors.

Panels
Witnesses at the hearing were grouped into four panels, three of which consisted of several representatives from various industries including fuel, energy, and real estate. The other included witnesses from several think tanks and research organizations.

Generally, industry stakeholders argued that many of these temporary tax breaks remain important, even after tax reform. Buchanan, however, repeatedly asked witnesses why additional incentives were needed after tax cuts and full expensing were provided through tax reform under the TCJA. Several Republican lawmakers, including Buchanan, stated that tax provisions only add to the uncertainty of the tax system.

Several industry witnesses argued, in essence, that not all tax extenders are created equally and should thus be evaluated individually. Barry Grooms, testifying on behalf of the National Association of Realtors, told lawmakers that the tax exclusion for forgiven mortgage debt is unique and should be made a permanent part of our tax law. "Since it was first added to the Internal Revenue Code in 2007, this provision has provided much-needed financial relief for millions of distressed households,"Grooms testified. This exclusion makes the tax system fairer, Grooms added, stating that it provides assistance to families experiencing hardships.

Policy
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told lawmakers that tax extenders are generally poor policy and that most should be allowed to sunset. According to MacGuineas, not only do tax extenders add to the federal deficit, the temporary nature of tax extenders makes it difficult for businesses and individuals to plan and invest. "To be sure, there are sometimes legitimate reasons for temporary tax policy – to respond to a natural disaster or economic downturn, to test effectiveness, or to provide transition relief – but most of the tax extenders are temporary simply to hide their budgetary cost," MacGuineas testifed.

Likewise, David Burton, senior fellow in economic policy at The Heritage Foundation, spoke to the costliness of tax extenders. Burton testified that 13 energy tax extenders are unwarranted. "At roughly $53 billion over ten years, the revenue lost from these provisions is substantial," Burton included in his written testimony. Additionally, Burton told lawmakers that tax extenders make the tax system less fair.

Seth Hanlon, senior fellow at the Center for American Progress, criticized Congress for not addressing tax extenders in the TCJA. Furthermore, Hanlon told lawmakers that tax extenders not only make the tax code more unstable and add to the federal deficit, but also complicate the IRS’s job during filing season.

"Congress should have ended the gimmicky routine on tax extenders long ago, and certainly should have done so in legislation that was billed as a once-in-a-generation tax reform," Hanlon testified. "But, better late than never."

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The IRS has released Frequently Asked Questions (FAQs) to address a taxpayer’s filing obligations and payment requirements with respect to the Code Sec. 965 transition tax, enacted as part of the Tax Cuts and Jobs Creation Act ( P.L. 115-97). The instructions in the FAQs are for filing 2017 returns with an amount of Code Sec. 965 tax. Failure to follow the FAQs could result in difficulties in processing the returns. Taxpayers who are required to file electronically are asked to wait until April 2, 2018, to file returns so that the IRS can make system changes.

In general, Code Sec. 965 imposes a one-time tax on the untaxed post-1986 foreign earnings of foreign subsidiaries of U.S. shareholders by deeming the earnings to be repatriated. The foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and remaining earnings are taxed at an 8 percent rate. The taxpayer may elect to pay the tax in installments over eight years.

Amounts must be reported by a U.S. shareholders of deferred foreign income corporation (DFIC) or by a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or a beneficiary of another passthrough entity that is a U.S. shareholder of a DFIC.

The Appendix to Q&A 2 contains a table that describes, separately for individuals and entities, how items should be reported on the 2017 tax return. For example, an individual reports the Code Sec. 965(a) amount on Form 1040, Line 21, with the notation SEC 965 on the dotted line to the left of the Line.

A person with income under Code Sec. 965 is required to include with its return an IRC 965 Transition Tax Statement, signed under penalties of perjury, and in the case of an electronically filed return, in pdf format with the filename 965 tax. A Model statement is provided. Adequate records must be kept supporting the Code Sec. 965 inclusion amount, the deduction under Code Sec. 965(c), the net tax liability under Code Sec. 965, and any other underlying calculations of these amounts.

The FAQs provide details on how to make the multiple Code Sec. 965 elections, including the election to pay the tax in installments over eight years. For each election, a statement must be attached to the return and signed under the penalties of perjury, and in the case of an electronically filed return, in pdf format.

Form 5471 must also be filed with the 2017 return of a U.S. shareholder of a specified foreign corporation, regardless of whether the specified foreign corporation is a controlled foreign corporation. A statement containing information about the Code Sec. 965(a) inclusion must be attached to the Schedule K-1s of domestic partnerships, S corporations, or other passthrough entities.

Tax must be paid in two separate payments. One payment will reflect the tax owed, without Code Sec. 965. The second payment is the Code Sec. 965 payment. Both payments must be made by the due date of the applicable return (without extensions). Additional details for paying the tax are provided in the FAQs.

Persons who have already filed a 2017 tax return should consider filing an amended return based on the information in these FAQs and Appendices.

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The U.S. Supreme Court reversed an individual’s conviction for obstructing tax law administration. The government failed to show that the individual knew that a "proceeding" was pending when he engaged in the obstructive conduct.

Background
The individual owned and operated a freight service that transported items to and from the United States and Canada. The government charged the individual with violating the "omnibus clause" of Code Sec. 7212(a), which imposes criminal liability on anyone who "in any other way corruptly … obstructs or impedes, or endeavors to obstruct or impede, the due administration of" the Internal Revenue Code (Title 26).

The government alleged that the individual obstructed tax administration because he: (1) failed to maintain corporate books and records; (2) failed to provide his accountant with complete and accurate tax information; (3) destroyed business records; (4) was hiding income; and (5) was paying employees with cash. At trial, the jury was instructed that it must unanimously find that he corruptly engaged in one of the practices listed. However, the jury was not instructed that it had to find that the individual knew he was under investigation and intended to interfere with that investigation. Subsequently, the jury convicted the individual on all counts. Then, the Second Circuit Court of Appeals affirmed his conviction.

Tax Law Administration
The Supreme Court reversed and remanded. According to the Court, the verbs "obstruct" and "impede" require an object. Therefore, the taxpayer must hinder a particular person or thing. Moreover, the omnibus clause serves as a "catchall" for the obstructive conduct, not as a catchall for every violation that interferes with tax law administration.

Nothing in the statute’s history suggested that Congress intended the omnibus clause to apply to the entire Internal Revenue Code, including the routine processing of tax returns, tax payments and tax refunds. Further, if the omnibus clause applied to all tax law administration, many tax misdemeanors might turn into felonies and make specific criminal provisions in the Code redundant. Accordingly, the phrase "due administration of" the tax code referred only to some acts, not everything the IRS does.

Overly Broad Interpretation
A broad interpretation of the omnibus clause would also risk the lack of fair warning. Interpreted broadly, the provision could apply to a person who paid a babysitter in cash without withholding taxes, left a large cash tip in a restaurant, failed to keep donation receipts, or failed to provide every record to their accountant. Such individuals may know they are violating an IRS rule. However, they would not think they could be prosecuted for obstruction. Further, if Congress intended that outcome, it should have made that clear in the statute.

Government’s Argument
Further, the Court rejected the government’s argument that the need to show the obstructive conduct was corrupt cured any overbreath problem. However, a taxpayer who "willfully" violates the tax code intends someone to obtain an unlawful advantage. Moreover, relying upon prosecutorial discretion to narrow an otherwise overbroad statute puts too much power in the hands of the prosecutor, and risks undermining public confidence in the criminal justice system. Therefore, to secure a conviction under the omnibus clause, the government was required to show that there was a nexus between the individual’s conduct and an investigation, audit or other targeted administrative action.

Reversing and remanding a CA-2 decision 2016-2 ustc ¶50,453.

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The Tax Code encourages charitable donations by businesses and industries. In fact, it is one tax incentive that President Bush has told his tax reform panel that he wants to preserve and strengthen. Taxpayers can make many different types of contributions, including inventory.

Amount of deduction

The amount of your deduction is generally the fair market value (FMV) of the contributed property, reduced by the amount of income you would have recognized if you had sold the property. FMV is the price the property would sell for on the open market. This rule effectively limits your deduction to your basis in the property.

Example. Elsa owns and operates a retail clothing store. She donates inventory that she normally sells in the ordinary course of her business to a charity. The inventory has a FMV of $1,000. It cost $400. If Elsa had sold the inventory, she would have recognized $600 income. Elsa's charitable contribution deduction is $400, her basis in the donated property.

The fair market value of your inventory may be less than its basis. In this case, only the fair market value may be deducted.

Example. Owen also owns and operates a retail clothing store. He follows Elsa's lead and donates inventory that he normally sells in the ordinary course of his business to the same charity. The inventory has a fair market value of $1,000. It cost $1,800. If Owen had sold the inventory, he would have recognized an $800 loss. In this case, the FMV of Owen's inventory is less than its basis. Owen's charitable contribution deduction is limited to $1,000, the FMV of the donated inventory. In this case, Owen is probably better off selling the inventory, recognizing the loss and then contributing $1,000 cash, which is fully deductible.

Costs and expenses

Any costs and expenses pertaining to contributed property incurred in prior tax years must be removed from inventory if they are properly reflected in opening inventory for the year of contribution. They are not part of the costs of good sold. Costs and expenses incurred in the year of contribution, which are properly reflected in the costs of goods sold for that year, are treated as part of the costs of goods sold for that year.

If you are thinking of donating inventory to a charitable organization, give our office a call. We'll help you maximize this valuable deduction.

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Many people are surprised to learn that some "luxury" items can be deductible business expenses. Of course, moderation is key. Excessive spending is sure to attract the IRS's attention. As some recent high-profile court cases have shown, the government isn't timid in its crackdown on business owners using company funds for personal travel and entertainment.

First class travel

The IRS doesn't require that your business travel be the cheapest mode of transportation. If it did, businesspeople would be traveling across the country by bus instead of by plane. However, the expense as it is relative to the business purpose must be reasonable. Taking the Queen Mary II across the Atlantic to a business meeting in the U.K. could raise a red flag at the IRS.

As long as your business is turning a profit and is operated legitimately as a business and not a hobby, traveling first class generally is permissible. Even though a coach airline seat will get you to your business appointment just as quickly and an inexpensive hotel room is a place to sleep, the IRS generally won't try to reduce your deduction.

However, if your trip lacks a business purpose, the IRS will deny your travel-related deductions. Don't try to disguise a family vacation as a business trip. Many people are tempted; it's not worth the consequences, especially in today's environment where the IRS is aggressively looking for business abuses.

Conventions

Convention expenses are deductible if a sufficient relationship exists to your profession or business and the convention is in North America. No deduction is allowed for attending conventions or seminars about managing your personal investments.

Overseas conventions definitely get the IRS's attention. If you want to deduct the costs of attending a foreign convention, you have to show that the convention is directly related to your business and it is as reasonable to hold the convention outside North America as within North America.

Country clubs expenses

Country club dues are not deductible. In fact, no part of your dues for clubs organized for business, pleasure, recreation, or social purposes is deductible.

Some country club costs may be partially deductible if you can show a direct business purpose and you meet some tough written substantiation requirements. These include greens fees as well as food and beverage expenses. They may be deductible up to 50 percent.

Meals and entertainment

Younger colleagues don't remember when business meals were 100 percent deductible and deals were brokered at "three martini lunches." Meals haven't been 100 percent deductible for a long time and, like other entertainment expenses, the IRS combs them carefully for abuses.

Expenditures for meals, entertainment, amusement, and recreation are not deductible unless they are directly related to, or associated with, the active conduct of your business. The IRS also requires you to keep a written or electronic log, made at the time you make the expenditure, recording the time, place, amount and business purpose of each expense.

Even if you pass the two tests, only 50 percent of meal and entertainment expenses are deductible. If you write-off business meals through your company and there is a proper reimbursement arrangement in place, you won't be charged with any imputed income for the half that is not deductible, but your company will be limited to a 50 percent write-off.

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Owning a vacation home is a common dream that many people share...a special place to get away from the weekday routine, relax and maybe, after you retire, a new place to call home.

Owning a vacation home is a common dream that many people share...a special place to get away from the weekday routine, relax and maybe, after you retire, a new place to call home. When thinking about buying a vacation home, you should also think about what you will ultimately do with it. Will it one day be your principal residence? Will you sell it in five, 10 or 20 years? Will you rent it? Will you leave it to your children or other family members? These decisions have important tax consequences.

You'll want to think about:

Capital gains

The maximum long-term capital gains tax rate for 2009 is currently 15 percent taxpayers in the highest brackets. For taxpayers in the 10 and 15 percent brackets, the maximum long-term capital gains rate is zero through 2010. However, these lower rates expire at the end of 2010. The maximum rate is set to rise to 20 percent in 2011. Congress also eliminated a special holding period rule but, again, only through the end of 2011.

The process of computing capital gains because of all these changes is very complicated. Yet, "doing the math" up front in assessing the benefits of a vacation home as a long term investment as well as a source of personal enjoyment is recommended before committing to such a large purchase. Our office can help you make the correct computations.

Renting your vacation home

Renting your vacation home to help defray some or a good portion of your carrying costs, especially in the early years of ownership, can be a sound strategy. Be aware, however, that renting raises many complex tax questions. Special rules limit the deduction you can take. The rules are based on how long you rent the property. If you rent your vacation home for fewer than 15 days during the year, all deductions directly attributable to the rental are not allowed, but you don't have to report any rental income. If you rent your vacation home for more than 15 days, you must recognize the rental income while being allowed deductions only on certain items depending on your personal use of the property. The methodology is very complicated. We can help you pin down your deductions and plan the true cost of ownership, especially if you're planning to swing a vacation home purchase on plans to rent it out.

Home sale exclusion

One of the most generous federal tax breaks for homeowners is the home sale exclusion. If you're single, you can generally exclude up to $250,000 of gain from the sale of your principal residence ($500,000 for married joint filers). Generally, you have to have owned your home for at least two of the five years before the sale, but like all the tax rules, there are exceptions.

Congress modified the home sale exclusion for home sales occurring after December 31, 2008. Under the new law, gain from the sale of a principal residence home will no longer be excluded from gross income for periods that the home is not used as a principal residence. This is referred to as "non-qualifying use." The rule is intended to prevent use of the home sale exclusion of gain for appreciation attributable to periods after 2008 during which the residence was used as a vacation home, or as a rental property before being used as a principal residence. However, the new income inclusion rule is based only on periods of nonqualified use that start on or after January 1, 2009, good news for vacation homeowners who have already owned their properties for a number of years.

Buying a vacation home is a big investment. We can help you explore all these and other important tax consequences.

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If you pay for domestic-type services in your home, you may be considered a "domestic employer" for purposes of employment taxes. As a domestic employer, you in turn may be required to report, withhold, and pay employment taxes on a calendar-year basis. The reporting rules apply to both FICA and FUTA taxes, as well as to income taxes that domestic employees elect to have withheld from their wages. The FICA tax rate, applied separately to the employer's share and the employee's share, is 7.65 percent.

If you pay for domestic-type services in your home, you may be considered a "domestic employer" for purposes of employment taxes. As a domestic employer, you in turn may be required to report, withhold, and pay social security and Medicare taxes (FICA taxes), pay federal unemployment tax (FUTA), or both.

The tax on household employees is often referred to as "the nanny tax." However, the "nanny tax" isn't confined to nannies. It applies to any type of "domestic" or "household" help, including babysitters, cleaning people, housekeepers, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. Excluded from this category are self-employed workers who control what work is done and workers who are employed by a service company that charges you a fee.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What and when you need to pay

If you pay cash wages of $1,700 or more in 2009 to any one household employee, then you must withhold and pay social security and Medicare taxes (FICA taxes). The taxes are 15.3 percent of cash wages. Your employee's share is 7.65 percent (you can choose to pay it yourself and not withhold it). Your share is a matching 7.65 percent.

If you pay total cash wages of $1,000 or more in any calendar quarter of 2008 or 2009 to household employees, then you must pay federal unemployment tax. The tax is usually 0.8 percent of cash wages. Wages over $7,000 a year per employee are not taxed. You also may owe state unemployment tax.

The $1,700 threshold

If you pay the domestic employee less than $1,700 (an inflation adjusted amount applicable for 2009), in cash wages in 2009, or if you pay an individual under age 18, such as a babysitter, irrespective of amount, none of the wages you pay the employee are social security and Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.You need not report anything to the IRS.

If you pay the $1,700 threshold amount or more to any single household employee (other than your spouse, your child under 21, parent, or employee who under 18 at any time during the year) then you must withhold and pay FICA taxes on that employee. Once the threshold amount is exceeded, the FICA tax applies to all wages, not only to the excess.

As a household employer, you must pay, at the time you file your personal tax return for the year (or through estimated tax payments, if applicable), the 7.65 percent "employer's share" of FICA tax on the wages of household help earning $1,700 or more. You also must remit the 7.65 percent "employee's share" of the FICA tax that you are required to withhold from your employee's wage payments. The total rate for the employer and nanny's share, therefore, comes to 15.3 percent.

Withholding and filing obligations

Most household employers who anticipate exceeding the $1,700 limit start withholding right away at the beginning of the year. Many household employers also simply absorb the employee's share rather than try to collect from the employee if the $1,700 threshold was initially not expected to be passed. Domestic employers with an employee earning $1,700 or more also must file Form W-3, Transmittal of Wage and Tax Statements, and provide Form W-2 to the employee.

Household employers report and pay employment taxes on cash wages paid to household employees on Form 1040, U.S. Individual Income Tax Return, Schedule H, Household Employment Taxes. These taxes are due April 15 with your regular annual individual income tax return. In addition, FUTA (unemployment) tax information is reported on Schedule H. If you paid a household worker more than $1,000 in any calendar quarter in the current or prior year, as an employer you must pay a 6.2 percent FUTA tax up to the first $7,000 of wages.

Household employers must use an employer identification number (EIN), rather than their social security number, when reporting these taxes, even when reporting them on the individual tax return. Sole proprietors and farmers can include employment taxes for household employees on their business returns. Schedule H is not to be used if the taxpayer chooses to pay the employment taxes of a household employee with business or farm employment taxes, on a quarterly basis.

Deciding who is an employee is not easy. If you have any further questions about how to comply with the tax laws in connection with household help, please feel free to call this office.

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This is a simple question, but the question does not have a simple answer. Generally speaking the answer is no, closing costs are not deductible when refinancing. However, the answer depends on what you mean by "closing costs" and what is done with the money obtained in the refinancing.

Costs added to basis. Certain expenses paid in connection with the purchase or refinancing of a home, regardless of when paid, are capital expenses that must be added to the basis of the residence. These include attorney's fees, abstract fees, surveys, title insurance and recording or mortgage fees. Adding these costs to basis will lower any capital gain tax that you pay when you eventually sell your home. If your gain is sheltered anyway by the home sale exclusion of $250,000 ($500,000 for couples filing jointly) on the eventual sale of a principal residence, any previous addition to basis, while doing no harm, will also do no good.

Costs neither deductible nor added to basis. Other costs are neither deductible nor added to basis. These costs include fire insurance premiums, FHA mortgage insurance premiums and VA funding fees, settlement fees and closing costs.

Interest expense. Taxpayers may deduct qualified residence interest, however. "Qualified residence interest" is interest that is paid or accrued during the tax year on acquisition or home equity indebtedness with respect to a qualifying residence.

Points. Points are charges paid by a borrower to obtain a home mortgage. Other names used for deductible points are loan origination fees, loan discounts, discount points and maximum loan charges. While a fairly broad rule permits the deduction of home mortgage interest, the rule governing the deduction of points is narrower and has a number of restrictions. Points paid to refinance a mortgage on a principal residence, like other pre-paid interest that represents a charge for the use of money, are generally not deductible in the year paid and must be amortized over the life of the mortgage. However, if the borrower uses part of the refinanced mortgage proceeds to improve his or her principal residence, the points attributable to the improvement are deductible in the year paid.

Prepayment penalties. In cases where a creditor accepts prepayment of a secured debt, such as a mortgage debt on a home, but imposes a prepayment penalty, the prepayment penalty is deductible as interest.

Applicable forms. To deduct home mortgage interest and points, you must file Form 1040 and itemize deductions on Schedule A; the deduction is not permitted on Form 1040EZ.

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