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States Sue U.S. to Void $10,000 Cap on State and Local Tax Deduction

Four states – New York, Connecticut, Maryland and New Jersey – have sued the federal government to void the tax-reform cap on the federal itemized deduction for state and local taxes, contending that limiting the deduction is unconstitutional. The taxes at issue include state and local income taxes, real property (real estate) taxes and personal property taxes.

These states – all Democratic (blue states), with some of the highest state and local tax rates in the nation – saw this deduction limitation as political retribution from the Republican-controlled Congress and have passed state legislation attempting to circumvent the tax reform provision limiting the federal itemized deduction for state and local taxes (SALT) to $10,000.

Both NY and NJ have created charitable funds that their state constituents can contribute to and allows them to receive a credit against their state and local taxes. NY’s legislation allows 85% of the amount contributed to the fund as a credit against taxes, while NJ allows 90%. The Connecticut law allows municipalities to create charitable organizations that taxpayers can contribute to in support of town services, from which they then receive a corresponding credit on their local property taxes. Each of these measures essentially circumvents the $10,000 limitation on SALT deductions.

However, two big questions are whether a donation for which a donor receives personal benefit is really a deductible charitable contribution and whether the state legislatures really thought this through. These work-arounds overlook one of the long-standing definitions of a deductible charitable contribution: the donor cannot receive any personal benefit from the donation.

Recently, the IRS waded into the issue with Notice 2018-54 and an accompanying news release, informing taxpayers that it intends to propose regulations addressing the federal income tax treatment of certain payments made by taxpayers to state-established “charitable funds,” for which the contributors receive a credit against their state and local taxes – essentially, the work-arounds adopted or proposed by the states noted above and others. In general, the IRS indicated that the characterization of these payments would be determined under the Code, informed by substance-over-form principles and not the label assigned by the state.

The proposed regulations will:

  1. “Make clear” that the requirements of the Code, informed by substance-over-form principles (see below), govern the federal income tax treatment of such transfers; and
  2. Assist taxpayers in “understanding the relationship between the federal charitable contribution deduction and the new statutory limitation” on the SALT deduction.

Substance over form is a judicial doctrine in which a court looks to the objective economic realities of a transaction, rather than to the particular form the parties employed. In essence, the formalisms of a transaction are disregarded, and the substance is examined to determine its true nature.

The implication of the IRS’s reference to the substance-over-form doctrine is likely that the formal mechanisms for implementing the state work-arounds – e.g., charitable contributions to “charitable gifts trust funds” – will not dictate their tax treatment. That is to say, the IRS will not recognize a charitable contribution deduction that is a disguised SALT deduction.

While the notice only mentions work-arounds involving transfers to state-controlled funds, another type of work-around has been enacted, and others have been proposed. In addition to the “charitable gifts trust funds” described above, New York also created a new “employer compensation expense tax” that essentially converts employee income taxes into employer payroll taxes. The IRS stated in Information Release 2018-122 that it is “continuing to monitor other legislative proposals” to “ensure that federal law controls the characterization of deductions for federal income tax filings.”

Allowing these work-arounds to stand would open Pandora’s Box to other schemes to circumvent the charitable contribution rules. For example, a church could take donations and then give the parishioner credit for the parishioner’s children’s tuition at the church’s school – something that is not currently allowed.

Have these states set their citizens up for IRS troubles if they utilize these work-arounds? Are these states now concerned that their work-arounds might not pass muster and will be ruled invalid after several years in the courts, so they are now pre-emptively suing the federal government?

Taxpayers in states with work-arounds should carefully consider all potential ramifications when deciding whether to get involved with something that could drag through the courts for years, with potential interest and penalties on taxes owed if (more likely, when) the IRS prevails.


Isler Northwest LLC is a firm of certified public accountants and business advisors based in Portland, Oregon. Our local, regional, and global resources, our expertise, and our emphasis on innovative solutions and continuity create value for our clients. Our service goals at Isler Northwest is to earn our clients trust as their primary business and financial advisors.

Isler Northwest

(503) 224-5321

1300 SW 5th Avenue
Suite 2900
Portland, Oregon 97201

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Americans paid $15 billion in overdraft fees last year, CFPB says

Article by Jackie Wattles | Featured on CNN Money

Americans have racked up billions — yes, billions — of dollars worth of overdraft charges.

In 2016, U.S. consumers paid a total of $15 billion in fees for bouncing checks or overdrafting –which is when a customer tries to make a purchase without enough money in their account to cover the transaction — according to new data released by the Consumer Financial Protection Bureau.

All banks with assets over $1 billion must report how much money it brought in via bounced check and overdraft fees, according to CFPB. And this year the industry rang up at $11.41 billion. That’s up 2.2% from 2015, which was the first year banks began reporting total overdraft and bounced check fees to the CFPB.

Adding in its best guess for what smaller banks and credit unions charged, and CFPB says $15 billion is roughly the grand total.

These fees are particularly troublesome for cash-strapped Americans, CFPB Director Richard Cordray said on a press call Thursday.

“Consumers living on the edge can find themselves racking up numerous overdraft charges,” Cordray said. “Despite recent regulatory and industry changes, consumers with low account balances and little margin for error continue to pay significant overdraft fees.”

Related: Money terms you’re too embarrassed to ask about

He also pointed out that the average amount of money consumers overdraft by is about $24 — but that banks often charge fees of around $34 for each overdraft incident.

Richard Hunt, the head of the Consumer Bankers Association, a bank advocacy group, responded to the study on Friday. He said he looks “forward to working with the CFPB on this issue, and we appreciate their concern for providing consumers with clear disclosures.”

But Hunt said banks already provide customers with “clear, concise procedures for opting into overdraft services,” and he pointed to a 2015 survey that found only 1% of respondents were confused by overdraft opt-in process.

Regulators have long been concerned about hefty overdraft charges.

The Federal Reserve decided to crack down on the issue in 2010 by mandating that banks must receive a customer’s explicit permission to approve a transaction when there are insufficient funds, and trigger overdraft fees. Otherwise, the transaction would simply be declined.

That year, the financial services industry was on track to make $38.5 billion on overdraft and non-sufficient fund fees, the economic research firm Moebs Services said at the time.

So, it appears that the fees have been curbed. But Cordray says data indicates some of the poorest Americans are still being hit hard by them.

He said customers that opt in and frequently overdraft “typically” wind up paying $450 per year in fees.

A 2014 Pew study also found more than half of the people who overdrew their checking accounts in the past year didn’t remember consenting to the overdraft service.

To address that issue, the CFPB said Thursday that it’s testing out a new version of the opt-in forms, which are designed to make the issue more clear for customers.

The updated form is meant to “explain that the opt-in decision applies only to one-time debit card and ATM transactions and does not affect overdraft on checks and online bill payments,” Cordray said.

“They also are designed to make clear that debit card and ATM overdraft is entirely optional,” he added.

Despite the agency’s concern, Cordray said the CFPB is not planning to propose stricter rules for banks when it comes to overdraft fees.


Isler Northwest LLC is a firm of certified public accountants and business advisors based in Portland, Oregon. Our local, regional, and global resources, our expertise, and our emphasis on innovative solutions and continuity create value for our clients. Our service goals at Isler NW is to earn our clients’ trust as their primary business and financial advisors.

Isler Northwest

(503) 224-5321

1300 SW 5th Avenue
Suite 2900
Portland, Oregon 97201

1 Bitcoin Is Now Worth More Than An Ounce Of Gold

Article by Laura Shin | Found on Forbes

Fueled by speculation that a bitcoin ETF could be approved by the Securities and Exchange Commission in the next week or so, the price of bitcoin has risen steadily, finally surpassing the cost of an ounce of gold on Thursday.

As of press time, one Bitcoin was worth $1,273 according to CoinDesk’s Bitcoin Price Index, and an ounce of gold was worth $1,244, according to precious metals retailer APMEX.

The market capitalization of all outstanding bitcoin also surpassed $20 billion for the first time in bitcoin’s history, according to Coinmarketcap.

The SEC is expected to make a decision on a bitcoin ETF proposed by Tyler and Cameron Winklevoss, the former Olympians who now run the cryptocurrency exchange Gemini and venture fund Winklevoss Capital, by March 11.
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Powerball Winners

Winners Of $1.3 Billion Powerball May Face Suits By Friends, Co-Workers, Family

Article by Robert W. Wood | Featured on Forbes.com | Image Credit: Julie Clopper / Shutterstock.com

The Powerball jackpot rose to $1.3 billion. These astounding numbers seem even more likely to brew big potential liabilities. Of course, the taxes on winning tickets are an unavoidable downside. Yet even after taxes, most people assume they will end up with a lot. But apart from paying the taxman, what if friends, family or co-workers claim a share of the loot?

It happens more often than you might think, often based on an alleged oral agreement. An innocent remark about splitting the winnings might be misinterpreted. Then, you must add the inevitable lawyers’ fees for defending against the claims. Most such cases settle, yet taxes can hit on such legal settlements in surprising ways too. The jackpots do not need to be in the hundreds of millions for winners to be targets. Take the 53-year-old California woman who won $1 million, but who faced a lawsuit by the liquor store owner who sold her the winning ticket.

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