Representor Summer 2019 - The Subject Is Taxing!

The latest on tax developments

by Stanton B. Herzog, CPA

Stanton B. Herzog, CPA, principal in the firm of Applebaum, Herzog & Associates, P.C., Northbrook,Ill., serves as ERA’s accountant and is a regular contributor to The Representor. He is available to speak at chapter or group meetings on a variety of financial and tax-related topics. He also participates in Expert Access, the program that offers telephone consultations to ERA members. You can call Stan Herzog at 847-564-1040, fax him at 847-564-1041, or e-mail him at

A number of state legislatures reacted to the passage of the 2017 tax law changes aimed at limiting the total tax deductions on form 1040 schedule A to $10,000. Taxes limited in this manner referred to the combined total of state income taxes, property taxes and real estate taxes. The most aggrieved states were the ones with high taxation — New York, California, New Jersey and Illinois. Some of these states had a bright idea — create a charitable trust to which citizens could “voluntarily” contribute; the state would issue a credit against the taxes owed. Of course, if the taxpayer did not contribute, the state would come after him or her for the taxes due. So, while “voluntary,” taxpayers would be betting their house or other assets on it.

Betting against your own house is probably not a good idea. States thought that cash contributions would have been deductible up to 60 percent of adjusted gross income without limit; problem solved. Of course, the IRS didn’t think so. The IRS immediately replied that this would not work.

That language has just been added to the tax law. In effect, the state credit offsets the charitable contribution rather than the state tax, leaving the state tax as the deduction limited to $10,000. The new law carves out an exception. If the state credit is 15 percent or less of the charitable “donation,” the taxpayer can have his charitable deduction. It appears that this exception was aimed at protecting easements or gifts of land for parks or historic buildings.

The new law creates a new Independent Appeals Office which is supposed to avoid litigation if possible by being an independent arbiter between the IRS and the taxpayer. This sounds a lot like the IRS appeals process at an earlier point in the process. Time will tell.

The IRS will be allowed to take credit card payments in the near future. The stipulation: the taxpayer pays all fees for the transaction.

The other “big” item in the new law is a new form of Health Reimbursement Account (HRA) which was created for small companies. In addition to any regular insurance program an employer may have, individual employees will be able to buy their own medical insurance and be reimbursed by their employer. As usual with company medical plans, the reimbursements will not be taxable to the employee, but will be deductible to the employer.

The employer can name a maximum amount it will pay. The employee can obtain any form of insurance — Obamacare, a regular medical insurance company, and, if eligible, Medicare. The employee must stay insured and cannot spend the allowance on supplemental insurance such as vision or dental care. If the employer reimbursement is not enough to cover the policy, the company can include a new area in its cafeteria plan to permit the employee to contribute to the plan to cover the difference in premium.

Of course, if the employee is receiving reimbursements from Obamacare, double-dipping will not be allowed. This is a plan; it has to be offered to all employees who fit the “class.” The employer’s contribution can be greater for some employees than others for a legitimate reason, such as age, disability or family size. It will be interesting to see the IRS regulations; they could be complex.

Along with the above insurance plan, the new law also will allow employers to reimburse employees up to $1,800 per year to cover actual medical expenses not otherwise reimbursed. It is called an Excepted Benefit HRA plan. An employee can be in this plan even if he has no other insurance.

Finally, the law created a requirement that the IRS notify a taxpayer if there is suspected unauthorized use of the taxpayer’s identity, and they are to notify the taxpayer if someone was charged with the crime. Further, an IRS agent will be assigned to a case of identity theft and will be the point person with the taxpayer until conclusion of the case.