Are you paying Mandatory Repatriation Tax and GILTI Tax?

The 2017 Tax Cuts and Jobs Act (“TCJA”) redefined the U.S. Tax Code as regards U.S. shareholders owning greater than 9% of foreign corporations by requiring them to pay a Mandatory Repatriation Tax on post 1986 accumulated undistributed income, that was previously deferred until those earnings were distributed (or deemed distributed) to the U.S. shareholders. The tax is often referred to as a Transitional Tax and the foreign corporations as Specified Foreign Corporations (“SPFC”).

In addition, the TCJA created a new concept in response to claims that American shareholders of foreign corporations located in No or Low Tax jurisdictions that they must currently pay tax on non asset generated income  that escaped taxation by foreign countries. This is known as the Globally Intangible Low Taxed Income (GILTI) tax. Under GILTI, the earnings of certain foreign corporations that is “deemed” distributed is included in the U.S. shareholder’s taxable income as well.

On the Supreme Court of the United States (“SCOTUS”) calendar this year is a case commonly referred to as “Moore” which challenges the constitutionality of the MRT. Should the SCOTUS rule in favor of Moore (and not the U.S. Government), not only the MRT be ruled as a violation of the 16^th Amendment, but also the GILTI tax as well as possibly the deemed distribution provisions that concern Subpart F.

Although some believe it unlikely that SCOTUS will rule against the government, given the irrevocable impact that such a ruling would have, should the SCOTUS rule in favor of Moore, refunds may be available to taxpayers who made payments during “open” years. By statute, with certain exceptions, most income tax years are closed to IRS assessments and taxpayer refund claims based on the later of three years of the due date of the tax return or two years after a tax is paid.

In this regards, as taxpayers had the option of paying the MRT over 8 years, some of those years may remain open (as well as years for which the GILTI tax applied should that be deemed unconstitutional as well). However, as a ruling is not anticipated until August, 2024, affected taxpayers may wish to consider possibly filing what is known as a “protective refund claim” for those years that remain open at this time. Accordingly, should you fall into this scenario, you may wish to discuss this with your tax advisor.

Advanced Child Tax and Earned Income Tax Credit Refund…

If you are middle income young taxpayers with young children, or earning less than the poverty line, file early as those refunds will be delayed.

In the early days of electronic filing, IRS used to publish an expected refund schedule that showed that most people who filed withing a specific date range should receive their tax refunds within 7-10 days by using electronic deposit and a few days more if they requested a paper check. However, due to a number of factors, including taxpayer abuses and fraudulently filed returns, IRS now states that most people can expect their refunds within 21 days. Below is the 2024 IRS schedule.

Yet IRS recently announced that those who submit a return that claims wither the refundable Advanced Child Tax Credit (ACTC) or the Earned Income Credit (EITC) may need to wait longer, possibly 5-7 weeks, assuming that the return is not selected for further review, which could delay processing the return until it is reviewed by an agent. I can only imagine that the reason for the delay is closely connected with the significant number of abuses that occurred when Congress approved the massive stimulus payments sent to people during the Covid-19 crisis. As a taxpayer, I certainly can’t blame the IRS for exercising caution in this regard.

However, as a tax professional, I also realize that many people use extra withholding as a means of saving throughout the year and often file early looking forward to their refund, and that many of these are middle income young parents who also qualify for the refundable AOTC as well. Unfortunately, there is nothing that can be done about that, but you can expedite the return processing by not claiming huge deductions relative to your income especially medical and charitable contributions without attaching receipts, filing before you receive all third party tax notices and forms reporting income (and withholding), not reviewing your tax return (even if prepared by a professional tax return preparer) to ensure that all income is reported.

The following is the refund schedule for returns without ACTC and EITC:

ACTC/EITC Refund approved by IRS	ACTC/EITC Direct deposit sent by IRS	ACTC/EITC Paper check mailed by IRS
January 29, 2024	February 27 to March 3, 2024	March 5 to 9, 2024
February 5, 2024	March 4 to 8, 2024	March 12 to 16, 2024
February 12, 2024	March 11 to 15, 2024	March 18 to 22, 2024
February 19, 2024	March 18 to 22, 2024	March 25 to 29, 2024
February 26, 2024	March 25 to 29, 2024	April 1 to 5, 2024
March 4, 2024	April 1 to 5, 2024	April 8 to 12, 2024
March 11, 2024	April 8 to 12, 2024	April 15 to 19, 2024
March 18, 2024	April 15 to 19, 2024	April 22 to 26, 2024
March 25, 2024	April 22 to 26, 2024	April 29 to May 3, 2024
April 1, 2024	April 29 to May 3, 2024	May 6 to 10, 2024
April 8, 2024	May 6 to 10, 2024	May 13 to 17, 2024
April 15, 2024	May 13 to 17, 2024	May 20 to 24, 2024

Estate Administrators: Estate Income Tax Timing is Everything

A Decedent’s Estate is a living legal entity that pays income tax, but how much it pays is controllable through planning.

Although some larger and more complex estates can take as many as three years to settle, most small estates are settled within 16 months, and in all the confusion that surrounds assuming the role of Estate Administrator, one of the most frequent and crucial responsibilities is Income Tax.

Although inheritances are not taxable, the Administrator is responsible for both settling the decedent’s final income tax as well as registering the Estate as an Income Tax Entity with IRS. This is because at the moment of death, all of the decedent’s assets automatically transfer to a new legal entity known as The Estate. This means, in addition to Surrogate Responsibilities, the administrator is responsible for obtaining a Tax Identification Number from IRS and notifying the decedent’s banks and investment fiduciaries of the name and TIN of the Estate so that the assets can be properly accounted for, tax wise.

As it is not uncommon for securities and other assets to be liquidated so that final expenses can be paid and distributions made to beneficiaries, and despite the fact that the tax basis of “inherited” assets  is the fair market value at the time of death, there is often income  generated within the estate  prior to the time that cash is distributed to beneficiaries. As a result, if not properly planned, that first year’s Form 1041 filing can result in a somewhat hefty tax bill, and to make matters worse, if the administrator does not plan the timing of payment of estate invoices for items such as fiduciary, legal and tax advisory fees, those hefty expenses can end up not being deducted against the estates taxable income.

An example of just how this could result is as follows. Assume that the assets of the Estate will not pass entirely to the surviving spouse and designated beneficiaries, but rather to several beneficiaries either named in a will or determined through probate. The administrator is so overwhelmed that the decedent’s most recent tax preparer is not contacted, nor is any tax advisor contacted for that matter, until the calendar year following the decedent’s passing when it is realized that a final income tax return Form 1040 needs to be filed for the decedent. But what about investment income or capital gains realized afterwards by the Estate? Let’s assume that at the urging of the banks or the attorney that a tax ID number was timely applied for, and now the Estate needs to report the income on Form 1041, but the largest expenses, the Fiduciary fees and expenses and the professional fees, including the accountant, were not yet paid in the year that the income was realized, resulting in overstated taxable income.

These expenses, known as Internal Revenue Code Section 69(e) expenses (or Miscellaneous deductions), were suspended for individuals under the 2017 Tax Act, but they remained available to reduce the taxable income of estates. But if the deductions are missed on the year in which the Estate realized the most taxable income, that could result in a significant overpayment of Estate Income Tax in the first year, and a significant taxable loss in year two, for the estate, while possibly finding that income tax is due of the final return of the decedent.

Although tax law allows final estate “69(e)” non-business expenses such as professional fees to be passed to the beneficiaries on the final Form K-1, that Miscellaneous deduction is virtually useless as since 2017 it is no longer deductible by individuals on Schedule A of Form 1040.

This is where planning takes its proper place, and why fiduciaries should contact the tax accountant without delay, not to mention that it should be one with experience in dealing with Estate Income Tax.

Beside setting things up and advising in advance what to expect including calculating a Pro Forma Final Decedent’s Personal Income Tax Return, decisions can be made regarding the type of Tax Accounting Method to use for the estate, projecting what the total expenses of administering the estate will be, how long the estate will last (less than one year, two years or possibly three), and most of all properly match the estate administrative estate expense deductions against the income of liquidating the estate assets thereby minimizing the income tax to the estate as well as the beneficiaries.

Contributed by:

Andrew Powers

Powers Tax Services

Often Missed Tax Deductions- Learning Disabilities & Thinking Differences

It is not uncommon for parents of children with learning and thinking differences to miss extremely valuable deductions. Did you know that educational related and even certain legal costs can be deducted as medical expenses when they are directly related to a child’s learning disability or thinking skills? Since 1978 the IRS has issued multiple revenue rulings, and the Tax Court has heard and ruled on numerous cases related to costs that address person’s with special needs, including private special education, related counselling, costs of home disability and special needs modifications, related travel and transportation can be included as medical expenses deducted on Form 1040, Schedule A. Certain legal expenses that are connected to procuring special education or assistance related to learning and thinking difference are deductible. The Tax Court has ruled that deductions for accommodating qualifying special needs includes disabilities and differences caused by emotional circumstances, not just biological.

Some of the expenses that are included as qualifying medical expenses included:

• special schools and private tutors that address the person’s learning special needs
  • including room and board
• transportation related to attending special schools and tutors
• technology related to addressing these special needs
• occupational, speech and behavioral therapies
• related costs to attend special seminars recommended by health care provider
• legal fees directly related to obtaining special services for persons with special needs
• childcare for young children with qualifying
• special needs, even if only one parent works

Additionally there are also other tax credits and benefits such as:

• child care credits for disabled children, even if over the age of 13,
• Achieving Better Life Experiences (ABLE) Accounts
• 529 accounts that cover up to $10,000 of K-12 expenses for special needs persons.

 

CCP Operations in Cuba-2023-Lessons Not Learned

For years, the Communist Party of the Peoples Republic of China have been expanding their presence and influence in Latin America, and only recently news has been released to the American public of Chinese espionage activities in Cuba and their plans to expand military bases 90 miles off the United States mainland. To those who are old enough to remember, and still alive, this is eerily similar to the events of the early Kennedy administration of the 1960s. Unbeknown to the American public at the time, the botched Bay of Pigs incident of 1961 led Cuba’s Fidel Castro, to request nuclear weapons from The Soviet Union, with who it had allied and had armed Cuba with conventional weapons. In January of 1962 American intelligence had noted an alarming increase in the number of Soviet cargo vessels transiting between Russia and Cuba, increasing steadily throughout the year. The waterlines of the cargo vessels made obvious that they were transporting extremely heavy cargo.

As a precaution, the American navy had increased its military maritime training activities along the east Atlantic coast and with Latin and South American allies. In late June, America’s first nuclear powered aircraft carrier, the U.S.S. Enterprise (CVN-65), had left port from Norfolk Virginia as its initial deployment to join the 2^nd Fleet carrying out a nuclear strike training exercise off the U.S. East Coast along with another American super carrier, the U.S.S. Forrestal (CVA-59) and naval assets. Unbeknown to the American public at the time, the U.S. was secretly preparing for a possible quarantine of the island of Cuba if necessary. As top secret intelligence  reports were coming out of Guantanamo Naval Base on Cuba of highly unusual Soviet activity on the island, along with belligerent Cuban air tactics including firing on American aircraft.

On 14 October, photographs taken by U-2 reconnaissance planes over Cuba revealed the presence of Soviet ballistic missile silos being constructed on the Island. As reported to the American public by the media, it was concluded by the Kennedy Administration that Soviet nuclear missiles may have already been delivered to Cuba and readiness for imminent deployment. As Cuba is only 90 miles from the U.S. state of Florida, this was obviously of grave concern. Unknown to American intelligence was that there existed 80 nuclear missiles capable of being launched against American targets.

A military quarantine of Cuba was ordered by President Kennedy to prevent further missiles from being reaching the island. Each day the Soviet ships would close the gap with American naval vessels, and over the next 14 days the world watched in fear as Soviet Nakita Khrushchev and American President Jack Kennedy exchanged secret communications to find a politically plausible solution to this dangerous situation.

Unbeknown to those outside the military, and for most of the world for many years after, October 27 was the closest the world had been, and has been since, on the verge of nuclear war. Throughout the quarantine, U.S. anti-submarine assets, that were in the forefront of the blockade, came upon a Soviet submarine, B-59, that had surfaced for air. The day had been plagued by tensions as one American U-2 spy plane disappeared while on recon in Europe, one was shot down while flying over Cuba earlier that day and word had just been received news of a second U-2 downing. The crew of Soviet submarine B-59, who had endured a long, tedious journey along with three other Soviet subs from their base in the Arctic Circle to Cuba. B-59 was not equipped for warm water operations and the cabin temperature had reached 149 degrees Fahrenheit. As it surfaced, American aircraft swooped down and circled the submarine, lighting its conning tower with glaring searchlights as they fired shots across the bow in an attempt to signal the vessel to surrender. The Soviet commander, who was by then convinced that war had already broken out panicked, giving the order for the sub to dive and prepare for nuclear torpedo launch. Under conditions such as these, a submarine commander has the authority to launch an offensive nuclear attack.

Only through divine intervention, the dive was momentarily delayed due to personnel confusion where in a split second, he realized that maybe he was being signaled by American aircraft not to dive but rather surrender. But as the sub continued its dive, American ships continued attempts to convince him to surface by dropping test depth charges in the water. As they were only capable of sounding a loud blast, some overly zealous American sailors took it upon themselves to drop hand grenades stuffed in toilet paper rolls that would delay explosion until the grenades were closer to the u boat.  The explosion and sound of shrapnel hitting the hull of B-59 only added to the confusion and nearly resulted in the order to launch the nuclear missile, comparable in strength to match the bomb dropped on Hiroshima, which would have led to a nuclear exchange between the U.S. and Soviet Russia resulting to an end of life as we know it.

Fortunately, Soviet naval officer Vasil Arkhipov, aware of the consequences, refused to fire that deadly weapon of war and the submarine surfaced. By the next day Kennedy and Khrushchev reached a solution that included the reversal of the Soviet ships and their disarmament of all nuclear missiles from Cuba.

Although I was only 10, I, and nearly all Americans of that time who are alive today, can close their eyes and recall the feeling of helplessness and emptiness, not knowing if their lives were going to end at any moment, and the feeling of relief when the news came that it was over. Yet here we are today, 61 years later, with news that the Communist Chinese have been preparing to build their own military installations in Cuba. History is repeating itself, yet few Americans realize it as they weren’t old enough or even born in 1962, and have no idea of the potential devastation that the world faces as a result of this reckless endeavor by the CCP.

IRS May be Ending Late Filing Amnesty-FATCA, CRS, OECD…

Tax Lives Even After Death- Efficiently Administering an Estate…

It is not uncommon for a family member to be asked to witness a will and be named Executor (or Executrix) of the estate upon death and ensure that person’s wishes are respected following their demise, nor is it uncommon for a family member to be notified that a relative has passed and that they are the next of kin but the decedent passed without a will, a/k/a intestate. Administering the estate could be challenging enough, but did you know that income tax lives on even after death? Most think that because inheritance estate tax threshold is now as high as it is, that taxes are not something to be concerned about. In fact, many attorneys who are not knowledgeable regarding income tax, may tell you the same thing. Nothing could be further from the truth.

Allow me to walk you through this, first a summary and later the detail. When someone passes away, immediately, a Decedent’s Estate is created, and once the backs and financial institutions are notified from third party sources, collecting dividends and interest and liquidating security accounts becomes a problem as the Decedent’s social security number is virtually inactivated and a new federal tax ID number is required. The application form for a federal tax ID number is SS-4 and this can be done online and the number issued immediately. From this point on, all dealings are with the Decedent’s Estate. Now, if there are no investment accounts (including no bank interest), this substantially mitigates the problem, however if taxable income is $600 or more, or if one of the beneficiaries is a nonresident alien, all income and deductible expenses need to be reported to IRS on Form 1041. Most states have their respective forms.  The due date is the 15^th day of the fourth month following the end of the estates taxable ear. By default, unless the year end is specified otherwise on the application, IRS will designate the estate as a calendar year with the tax return due date being April 15. Now if the estate will be settled before December 31 of the year of death, this is fine, but if the person passed during the later part of the year and if a few months more are required you may want to apply and file as a fiscal year end. I strongly advise taking these steps, beginning with the tax ID number application, with a qualified income tax specialist who has done this before and knowledgeable regarding the laws and potential pitfalls, and I advise against going this alone as you will face issues such as who will be responsible for paying the tax (the estate or the beneficiaries), are the assets (including the earned income of the estate) deemed distributed (even if they are not), and may other issues

Now we need to switch gears and look to the final tax return of the decedent. As a calendar year taxpayer, a final tax return is due by April 15. The estate administrator will need to ensure that if the decent owes income tax on their final return, that the tax is timely paid. In the event that all the assets are distributed to beneficiaries and there is no money remaining, the estate administrator is responsible for any unpaid tax liabilities. If there is a refund, the money is combined with distributable assets and distributed to the beneficiaries.  If there is a refund, Form 1310 is required to be filed with the tax return, providing the decedent’s court designated administrator or other representative’s name and social security number and that person is required to sign the tax return.

Basic Legal Requirements and Estate Administrator Requirements

When someone passes away it is necessary to consider many issues, such as is there a surviving spouse who has joint ownership and survivor entitlement to the assets, who are named beneficiaries of the decedent’s insurance policies or other financial accounts, including employment assets and benefits, final wages and other Income in Respect of a Decedent (IRD) that is reported on the final tax return of the decedent. Are there pension or other retirement accounts where no beneficiary is stated. Sometimes (and as a tax professional, I have seen this instance) a the decedent had named a beneficiary to a retirement account prior to getting married and never changed the named beneficiary to the new spouse. Although under the Employee Retirement Act of 1974 (ERISA), retirement benefits are required bylaw to be paid to the surviving spouse, often confusion arises due to the named beneficiary other than the spouse, and benefit payments are delayed and sometimes come to a halt. In one instance that I witnessed, the surviving spouse hired an attorney to resolve the issue. Although knowledgeable with Elder Care Law, this attorney took a substantial fee to file a petition with Surrogate Court requesting a Court Order to be issued to the decedent’s employer to pay the benefits to the surviving spouse, when in fact, all that was necessary was to site for the employer’s benefit administrator the statutory ERISA provision that mandated that the surviving spouse was the legal beneficiary, which would have quickly resolved the matter. Unfortunately, the Court Order further complicated the matter and benefits that would otherwise be exempt or subject to different tax reporting if paid to the surviving spouse, were incorrectly reported as the would be to a non surviving spouse. Her legal and tax advisory fees were substantially greater than they should have been merely because she failed to consult with an experienced tax advisor first.

Estate planning usually involves drafting a Last Will and Testament. However if there is no will, the person is known as having passed “intestate”. Depending on facts and circumstances including whether or not there is a surviving spouse and/or the size of the estate and the nature of the assets, this may-or may not-be a issue as different laws and rules may apply. Note that every state has its own laws regarding surrogate matters, so there is no “one size fits all”. A small estate (which is often simplified) in one jurisdiction may not qualify for small estate rules in another. My suggestion (and this is not “legal advice”) is that you first check the Surrogate Court internet website and other information that is applicable to the state jurisdiction of the decedent’s legal residence which is available on the internet. After you have updated yourself, then choose a qualified attorney to guide you through the process and if necessary handle legal matters for the estate. Keep in mind that not only are the fees of the accountant and the attorney to be paid from the assets of the estate, they should be determined or estimated early on so hat these expenses can be budgeted when it is time to distribute assets to the beneficiaries. Also, most states (if not all) have a designated maximum fee that can, and should be, paid to the estate administrator. This amount is often determined by the size of the estate. The fee can be waived by the administrator, but if it is, this should be in writing  and duly witnessed or notarized to avoid later unpleasantries.

As previously stated, estate planning usually involves drafting a Will. When a will designates a person who agrees to administer the last wishes of the decedent, as stated in their will, that person is known as the Estate’s Executor (or Executrix). The executor is responsible for ensuring that the debts of the decedent are paid and that assets are distributed to the beneficiaries in accordance with the terms of the will.

After death occurs, the executor should file the will, along with a death certificate, with the Surrogate Court (also known as Probate Court). This is a legal requirement. This begins the probate process, including the time that the Court appoints a person as executor or administrator of the estate. Keep in mind that even if someone is named as executor within a will, even of that person previously agreed to serve as executor, they are under no legal obligation to do so, although they do have the obligation to file the will with the court, after which the court will appoint a different executor, or administrator. When there is no executor or administrator appointed, assets may remain in estate indefinitely, causing problems.

Penalty for Failing to File a Will with Probate Court

Failing by an executor, administrator, or other legal representative to file a will with the court can open a world of nasty penalties.  Although most states don’t make it a crime (criminal act) not to file the will with the court, not filing the will could create legal and monetary exposure to the person if sued by a beneficiary who was financially harmed by the fact that the will was not filed. This is actually stipulated by statute in some states. Also, if the failure to file is coupled by evidence that the act was intentional for the purpose of personal financial gain, the act becomes criminal.

Debts of the Estate and Creditors

Although family members and beneficiaries to an estate are under n legal obligation to pay the debts of a decedent, that may not be true regarding the executor in the event that the estate was determined to be mismanaged with funds distributed to beneficiaries prior to paying creditors that which they have legal claim and standing. However, by filing a will in Probate Court, the time in which creditors have to make legal claim against the estate is reduced from one year to four months from the date that the executor or administrator is appointed.

Probate is not always required but often suggested-Small Estates

Probate is the process of legally transferring the assets of the decedent’s estate to the beneficiaries. Most states have a streamlined process, usually determined by the value of the estate (between $10,000 and $100,000 depending on the state jurisdiction) and/or the nature of the assets, whereby state law refers to this as a “small estate” and exempts formal probate (and often the filing of the will) and instead provides a simplified process that is often referred to as “transfer by affidavit” or “voluntary administration”. For example, NYS provides that, regardless of whether or not a will exists, if the personal property of a decedent’s estate is less than $50,000, then it is a Small Estate and permitted voluntary administration. However, if the decedent owned real property in their name alone, the estate is no longer deemed to be considered small. If the real property is jointly owned, and personal property is less than $50,000, it is a “small” estate. In cases where there is real property and a will exists, a probate proceeding should be filed. If real property exists but there is no will, administrative proceedings are required. It is also suggested that even if the assets at the time of death were less than $50,000, in the event that a wrongful death or other lawsuit may be field in the future, a probate or administrative proceeding should be filed in order to preserve such future claim.

In cases of a Small Estate, NYS has a So It Yourself (DIY) program and form. NYS provide a step by step guide. For more information regarding NYS probate law and guidelines, visit NYS.Gov.

Some other points to consider when determining whether probate is or is not required to affect the transfer of property are as follows:

• In cases where property is held in joint tenancy with right of survivorship, property transfers automatically to the co-owner without the need of probate. However, in cases of “co-ownership via joint tenants in common, the property must be transferred by probate.
• In community property states, joint property will transfer to the spouse.
• Some assets, such as “transfer on death (TOD)” financial accounts such as life insurance contracts, IRAs and other retirement accounts, will transfer automatically to the named beneficiary.
• Assets held in trust, are not deemed to be held by the decedent’s estate, and therefore transfer to their heirs without the need of probate.
  • It should be noted that revocable trusts automatically become irrevocable at the time of the death of the trust grantor.

In conclusion, if a loved one has passed and you need to learn what you need to do in order to claim inheritance, or of you wish to be a voluntary administrator of an estate, it is advised that you consult with a probate attorney in the jurisdiction of the decedent’s last known place of domicile. However, it cannot be overly stressed that anyone faced with being appointed as or acting in the capacity of an executor or administrator should contact a tax specialist who is qualified and competent regarding matters of estate income taxation. Whereas law offices of probate attorneys will only handle preparing and filing the federal and state Estate Tax Returns (death taxes), many, if not most, do not handle or even advise or go near income taxes, as that is not their area of expertise unless they are qualified Tax Attorneys as well. A qualified estate income tax specialist (who also understands ERISA laws dealing with the decedent’s retirement and death benefits) can work closely with the estate attorney and make the process to much smoother and avoid unwelcomed complications including those regarding an administrator’s personal liability for unpaid taxes and claims.

COMING TO AMERICA: U.S. Taxes for Aliens (including asylees)…

Non U.S. individuals and foreign owned businesses with U.S. source income face many challenges when it comes to complying with U.S. income tax. Aliens with income from U.S. sources file differently depending on the type of the income, if the are non-residents, residents, working on temporary assignment or permanent or part year residents and whether their income or status is covered by a tax treaty. Also, if a U.S. business is owned by non U.S. persons, special reporting is required. When faced with these situations one needs to ask, do I file Form 1040NR, Form 1040 or a combination of both and which would be the primary return and which the attachment. Other possibilities are if the person is married to a U.S. person and their filing status. If filing as Married Filing Jointly an International Tax Identification number is required and of course in order to be employed in the U.S., a Social Security number is required.

Beside tax cost, incorrect filing can affect their visa renewals of pathways to citizenship as not only is income tax return filing required if receiving U.S. source income, but filing the correct tax return is vital.

The same is true for foreign businesses with U.S. source income, particularly when that income is effectively connected with a business located in the U.S. U.S. taxpayers who own an interest in foreign businesses need also be tax compliant. Now while there are no U.S. income tax consequences for a foreign business selling to U.S. customers by independent sales agents and where title exchanges outside the U.S., Steps need to be taken to determine if that foreign business is deemed to have a permanent establishment in the U.S. Things like exercising control over the U.S. sales agent can be interpreted as having sufficient nexus in the U.S. thus requiring the filing of Form 1120-S which in itself can be an extremely difficult tax return.

A word about FIRPTA. In addition to paying U.S. income tax on income generated from rental income property located in the U.S., a foreign national who makes an investment in or purchases real property that is located in the U.S. is subject to special tax withholding rules under the Foreign Investment in Real Property Tax Act when they dispose of that interest. Pursuant to FIRPTA, any person who acquires an interest in U.S> property from a foreign national (individual or business entity) is required to withhold and remit the tax to IRS at a rate of 15%.

In summary, the rules pertaining to foreign national with U.S. sourced income are far more complex than those applicable to a U.S. person who earns compensation for services performed outside the U.S.

FOREIGN BANK and SECURITY ACCOUNTS AND OTHER FOREIGN FINANCIAL ASSETS. In closing, I would like to make reference to ownership on foreign bank or security accounts and other foreign assets. Although a foreign national who is not deemed a U.S. resident for tax purposes is NOT required to annually file Form 114a, commonly referred to as the FBAR report (the Foreign Bank Account Reporting Act), even if a joint tax return is filed with a U.S. person, those persons ARE responsible for complying with the requirements of the Foreign Account Tax Compliance Act (FATCA) if they are filing a joint return with a U.S. person and the reporting exemption threshold is exceeded. Note, however, that if a U.S. person has joint ownership of a foreign bank account with their NRA spouse (or other person), the details regarding the name and address of the foreign spouse (or other person) are required to be reported.

Andrew Powers of Powers & Company, as a U.S. international tax specialist, has extensive experience helping clients with these very issues mentioned above. If you require assistance, he can be contacted by email at a.j.powers@tax-power.com.

NEW BUSINESS OPPORTUNITIES AND CHALLENGES CREATED BY THE INTERNET…

The age of the internet and now the Covid crises has created a world of new business opportunities and challenges for Americans ranging from online sales to GIG workers. A focus on multistate sales tax.

CASUAL SALES

Most states do not require sales tax to be collected on casual sales, and each state determines the threshold on what are, and what are not a casual sales, and this threshold is usually based on the number and dollar amount of sales. Thus, an individual who occasionally sells used personal property is not required to collect sales tax from the buyer and then remit it to the state or other taxing jurisdiction. As regards large sales of registered property, such as used vehicles or boats (with motors), the buyer would pay the use tax to the Department of Motor Vehicles at the time that the vehicle or boat was registered. Another example would be that someone who sold used personal property at a yard or tag sale are not required subject to sales tax requirements.

PHYSICAL NEXUS

Multistate sales tax was a basic concept, and many of those laws remain in existence today. The premise of these laws was twofold. First the intent was to avoid double taxation of personal property sold to a buyer who would resell the same item. Secondly, the intent was to eliminate the burden of registering and collecting sales tax on sellers who sold their merchandise out of state. Paramount to this was the concept of “nexus”. If a vendor had “nexus”, or sufficient presence, within a state then they were required to register to do business in that state or local jurisdiction and obtain a permit to collect sales tax from customers in that jurisdiction who purchased their merchandise. So if a New York business, for example, accepted orders from and sold their merchandise to out of state purchasers, unless they had sufficient nexus to require that they register to collect sales tax from end user customers in that state, they were not required to collect sales tax and remit it to that state. To avoid double taxation on a single item, the concept of “end user” applied, so resellers would provide their vendors with “resale certificates” in order not to pay sales tax to the vender from whom they purchased the merchandise but when they sold the item to the ultimate user of the item, if that customer was located withing the jurisdiction where they were registered, they would collect sales tax assessed upon the total value of the item. If shipping and handling were included in the total price then sales tax was charged on that total price. Alternatively, if shipping was invoiced separately, and the item were delivered by a common carrier (such as the USPS, UPS or rail), the shipping charge (or freight) was not subject to sales tax (as sales tax was paid by the common carrier business based on its sales, unless it was a government exempt organization). Ultimate users of the purchased property were required to pay a “use tax” to the sales tax jurisdiction where they were located (and registered if they were a business). To summarize, only the end user would pay sales tax and paid no sales tax on separately billed shipping charges that were not included as “free shipping” with the item’s price. Another key concept was (and still is) where the sale (or transfer of legal title) took place (a/k/a the F.O. B. shipping point). That was determined by the point in time that legal responsibility for the item transferred from the seller to the buyer.

This was often of paramount importance to sellers and buyers of catalogue sales; however when the internet began to evolve around the time of the turn of the millenium, along with the opportunity to facilitate multistate sales over the internet, chatter regarding an “internet tax” began to evolve as well. That is when states began to realize that they were losing substantial sales tax revenue on internet sales. That is when taxable jurisdictions (such as New York) began to require individual purchasers (non business) who were the ultimate user of the property to voluntarily remit their use tax along with their income tax return. However not everyone was complying with use tax laws and enforcing it was virtually impossible.

GAME CHANGER FOR ONLINE RESELLERS – ECONOMIC NEXUS     

In June, 2018, however, a U.S. Supreme Court decision was handed down in South Dakota v. Wayfair that was a game changer for on line resellers by creating a concept to become known as Economic Nexus. The result was that online venders of one state, who sold to customers who were located in another state, would have what became known as economic nexus in the destination state, regardless of where title changed. Each state would determine the threshold for sales tax registration and compliance. For example, assume a state had a compliance threshold of any number of sales totaling $100,000 or 200 or more sales totaling more than $25,000 sales. These sellers would then be required to register and apply for a sales tax permit in that jurisdiction if they met that threshold.

MARKETPLACE FACILITATORS 

As marketplace facilitators bring together buyers and sellers from all different jurisdictions. Up until the Wayfair decision, they were absolved of any sales tax obligations, other than their own on fees charged to its customers, and they too were subject to physical nexus rules. As a result, online sales mostly escaped sales and use taxation. However, Wayfair changed all that. States began imposing requirements that online marketplace facilitators such as eBay, ETSY and Amazon begin collecting sales tax (on behalf of the seller) based o the rules of the destination state, and their threshold was based on the number and dollar amount of the transactions conducted through the market facilitator. Thus if a seller located in New York sold to a customer located in Illinois, the facilitator would include sales tax on the final value fee paid on the item, regardless of whether it was or was not a casual sale, and sales by individuals and not only businesses wee also being charged sales tax. The individuals are not subject to any requirement to obtain permits or sales tax compliance.

DOUBLE (OR MULTIPLE) TAXATION

But what about double taxation? An individual who needed to make a few extra dollars by selling merchandise on eBay that they purchased online through a facilitator, paid sales tax when the item was purchased. However, when that same item were resold through a facilitator, it was taxed a second time, and every times that it was resold. Thus that item, such as a collectible coin (while the transfer of currency for market value is not subject to sales tax, currency that is deemed collectible (sells for more than face value), is taxed multiple times.

To mitigate this situation, marketplace facilitators now provide their customers the opportunity of purchasing a sales tax reseller permit. eBay, for example, will “sell” their members, for $125, a sales tax resale permit that enables the customer to purchase an item without paying sales tax, but they the sale to a non permitted buyer is deemed a sale to an end user and thereby subject to sales tax. But for this to make sense, the total amount of sales tax applicable to their purchasers, needs to exceed $125. Alternatively, a business that is registered for sales tax within a jurisdiction, is permitted to provide the marketplace facilitator with a copy of the resale. Many jurisdictions have a provision that enables them to avoid the registration and compliance requirements to businesses that sell ONLY through marketplace facilitators a waiver from registering and complying with sales tax requirements, thus shifting the entire sales tax burden onto the facilitator unless they otherwise are meet the threshold through their online direct sales (I.E. through their company website). However, there are those who include sales through facilitators with online direct sales in their threshold. So assume the state has a $100,000 threshold and they sell $75,000 through a facilitator and $50,000 directly, they would meet the threshold for sales tax compliance in that jurisdiction.

It is pf paramount importance to understand that sales tax collection and remittance is a FIDUCIARY responsibility. Failure to comply with sales tax requirements can lead to personal liability and criminal exposure for not only business owners but their directors and officers who can be held personally responsible and accountable. That means that they could be held personally responsible for payment of unremitted tax as well as financial and personal penalties-plus the cost of legal defense.

A SALES TAX LABYRINTH

So as you can see, the world of online sales and use of a marketplace facilitator has created its own world of complicated and intricate passageways and possibly blind alleys with items being taxed multiple times, to resale businesses possibly purchasing permits while still failing to meet their own sales tax requirements. The issues and potential problems are many.

A WORD ABOUT INCOME TAX 

Up until 2022, marketplace and payment facilitators (a/k/a Third Party Service Organizations-TPSOs, and Electronic Payment Facilitatos-EPFs) were not required to notify the IRS of sales transactions until they exceeded 200 transactions and $20,000. However, beginning January 1, 2023 (the rules were extended a year) any number of transactions that exceed $600 will need to be reported to the IRS on Form 1099-K. Although the rules were intended by The American Rescue Act to be effective for 2022, the IRS realized the complicated mess that was created and the burden it will create for the TPSOs and the EPFs, not to mention the IRS will need to sort this out and respond to taxpayers who received incorrect forms that were fed into the IRS computer thereby generating large deficiency notices, penalties and interest, especially when gifts are erroneously reported as merchant sales as well as potential duplicative reporting by EPFs such as PayPal or Venmo and TPSO Marketplace Facilitators such as Etsy, Amazon or eBay. This alone would keep the 87,000 new IRS agents occupied.

CONCLUSION 

If you are an occasional seller or reseller of items, such as collectible coins (even if your selling junk coins for their melt value-it is still deemed a collectible subject to tax), the buyer of your item will pay tax to the facilitator. If you buy something for a low price and resell it, you will pay sales tax on the purchase of the item, and then you will pay a facilitator fee on the value of the item often including shipping and handling, even if separately stated. If you use “free shipping” as a sales incentive, that amount will be subject to sales tax, thus mitigating to some extent, the benefit of free shipping to the customer.

If you are a business selling online, either directly or through marketplace facilitators, you need to understand the rules of the states in which you customers are located and comply with those rules. If there is duplicative payment of tax by you as a buyer and then when the item is resold, you need to understand how this may impact your business and how you need to deal with this as a business. If a state or taxing jurisdiction includes marketplace facilitator sales in the threshold for total sales in determining whether or not you need to register, obtain resale sales tax permits and file sales tax returns (even if you don’t owe tax), you need to understand with and comply with these requirements (or your tax accountant needs to understand).

The internet, and now Covid has created new opportunities for self employment or to make money as a GIG employee or independent contractors.

IRS Delays Onerous Reporting Rules for Payment Platforms

It was just announced that, in absence of Congressional action, the IRS is postponing the revised $600 Form 1099-K threshold (enacted by the American Rescue Act of 2021) for ecommerce apps such as eBay, ETSY, PayPal and Venmo, reverting to the old $20,000 threshold. Although no determination has yet been made to whether this only pertains to 2022 (forms required to be filed by January 31, 2023) or if it will be permanent, this is good news as IRS admits that the $600 threshold would result in mass confusion. The reason is obvious. At a threshold of $600, someone who sold a personal item that cost a greater amount but not entitled to deduct a loss on their tax return (losses from the sale or exchange of personal items cannot be deducted from individual income on Form 1040) would need to report the sale proceeds from the 1099-K as Other Income (Schedule I) of their tax return. If the basis (cost) was greater, the deduction, limited to the amount of proceeds received, would be also reported on Schedule I as an adjustment resulting in no gain or loss. If for some reason the item was sold as a gain, the transaction would be capital in nature and reportable on Schedule D.

IRS also acknowledged that the $600 threshold would most likely have resulted in possibly millions of IRS CP2000 matching notices being mailed to taxpayers who either failed to report the “loss”
transactions or reported them incorrectly and the confusion and burden imposed on the taxpayers as well as the effort imposed on IRS to deal with taxpayer responses to these matching notices.

Proceeds received for the sale of goods as a business (by a Sole Proprietor or Single Member LLC are reportable on Schedule C as income from self-employment where the cost is reported as Cost of Goods Sold, and of course other business operating expenses would be deducted on Schedule C as well. Any resulting gain would be subject to Self-Employment tax (Social Security contributions) in addition to income tax. Business operating losses are deductible from other income and excess losses can be carried forward to future years.

Although proposed tax legislation amendments, such as the Snoop Act (introduced in February 2023), that would have returned the reporting threshold to $20,000 has little chance of being passed, the delay gives both IRS and the taxpayers time to understand this requirement better but most importantly, it gives IRS an opportunity to draft regulations necessary to better achieve the legislative goal of closing the tax gap while mitigating burdens such as that which would result from a cash app being used for personal cash transfers to friends and family such as cost sharing or  sending someone a wedding gift that would not be taxable because it was a gift. Regardless, however, the burden of proof pertaining to matters such as large gifts, would most likely be the responsibility of the taxpayer-however for such matters reported on a Form 1099-K or other 1099-K errors, the recipient would need to contact the App platform to seek a correction.

 

 

 

 

How do IRS’s 2022 challenges and positions affect you?

IRS challenges and positions affect you?

It has a backlog of unprocessed filings…From last year: 6 million 2020 Forms 1040, many of which were mailed in and requested refunds. 2.3 million amended returns filed on Form 1040-X. Plus, millions more in business and payroll tax returns. Agency officials can’t even provide a time frame for when returns will be processed, or refunds sent out. All they say is don’t file a second return or contact IRS.

The Service isn’t timely responding to written correspondence from taxpayers or tax professionals who are representing their clients. Mailings continue to pile up or remain unanswered because of COVID and social distancing restrictions. IRS’s response time is dismal, far greater than its targeted 30- to 45-day goal.

To make matters worse, it’s continuing to send out automated notices, sowing confusion among taxpayers. For example, some people who sent in documents tin response to an IRS letter are getting erroneous notices from the agency, some of which even assess penalties for failure to timely respond. Other taxpayers who requested penalty abatement or other tax relief in writing now find themselves embroiled in IRS’s automated collection process, through no fault of their own.

The Service is offering very narrow relief. It is suspending some notices, but only in cases in which it has credited taxpayers’ accounts for payment sent in but there is no record of a 2020 return being filed. IRS recognizes that these people likely filed paper 1040s by mail, and those filings have not yet been processed.

But lawmakers, preparers and taxpayer advocacy groups want more. A coalition of tax preparer organizations is asking IRS to provide limited relief from the underpayment penalty, temporarily cease automated compliance actions, and put collection holds on accounts of taxpayers who request penalty relief, among other things. Approximately 200 House Democrats and Republicans echo these recommendations and are putting pressure on the Service to act fast.

IRS is promoting online accounts for individuals. Here are some features: You can check to see if you owe back taxes, and the amount of interest and penalties. You can make a payment online and review the various payment plan options. You can view the stimulus check amount and the monthly child tax credit payments that IRS says you received, as well as the total estimated tax payments that you made.

But new security measures for accessing the accounts are getting flak, especially the need for individuals to submit a driver’s license or other photo ID and to take a selfie with a smartphone or computer webcam. These procedures also apply to individual taxpayers who request an online installment agreement, use IRS’s Get Transcript web tool, or who seek an identity protection PIN. Opponents of the ID.me facial recognition technology say the process is invasive. The intense pushback is causing IRS to explore other ways to increase online security.

Retirement updates

Many key dollar limits on retirement plans and IRAs are higher in 2022.

The maximum 401(k) contribution is $20,500. People born before 1973 can contribute an extra $6,500. These limits also apply to 403(b) and 457 plans. The cap on SIMPLEs ticks up to $14,000. People 50 and up can put in $3,000 more.

The 2022 pay-in cap for traditional IRAs and Roth IRAs remains $6,000, plus $1,000 as an additional catch-up contribution for individuals 50 and older.

But the income ceilings on Roth IRA pay-ins go up. Contributions phase out at AGIs of $204,000 to $214,000 for couples and $129,000 to $144,000 for singles.

Also, deduction phaseouts for traditional IRAs start at higher levels, from AGIs of $109,000 to $129,000 for couples and $68,000 to $78,000 for single filers. If only one spouse is covered by a plan, the phaseout for deducting a contribution for the uncovered spouse starts at $204,000 of AGI and ends at $214,000.

New life expectancy tables for calculating RMDs apply for 2022 and beyond. The revised tables allow distributions to be spread out over more years because they account for more-current individual mortality rates than the past tables. Basing RMDs on longer life expectancies allows plan participants and IRA owners to take out smaller annual payouts, letting them keep money in their accounts longer.

 

 

 

Documentation Required for ALL Charitable Donation Deductions

Regardless of whether you itemize charitable donation deductions on Schedule A, claim an above the line allowable deduction for qualifying donations of $300 (Single) or $600 (married filing jointly) or deduct donations made through your IRA, ALL deductions for charitable donations are required to be supported by receipts or other substantiating documentation.

There is no IRS “allowable amount”, and any deductions taken on your tax return that cannot be substantiated with a receipt or other documentation will not only be disallowed on audit, the disallowed amount may be subject to a variety of penalties (including substantial accuracy penalties both taxpayer and tax preparer penalties for intentional understatement of income.

This is now a very hot item on the IRS agenda and with all the money given away or spent by Washington these past two years, I wouldn’t be surprised to learn that the IRS computer will now automatically mail charitable contribution documentation requests to everyone who claims a charitable contribution deduction.

 

Tax Savings Strategies for Seniors: Contributions to Charity using…

People 70 ½ and older can transfer up to $100,000 yearly from Individual Retirement (savings) Accounts (“IRA) directly to charity. These payments are known as Qualified Charitable Distributions- (QCDs). The advantages to making a QCD include the following:

• If you are subject to Required Minimum Distribution (RMD) rules, the QCD counts toward your RMD
• With the increase in the standard deduction, far less people itemize deductions making their charitable donations are not deductible. Paying your charitable contributions directly from your IRA allows you to claw back that deduction and the amount donated will lower your taxable income by the amount of your QCD.
  • Thus, even if you don’t itemize your deductions (and take the standard), QCDs can lessen your tax burden.
    • This is because after including the full amount of IRA distribution reported on your Form 1099 from the plan fiduciary, the amount that qualifies as RCDs is subtracted in determining the taxable amount, thus lowering your gross income and thus adjusted gross income (AGI)
• Lower AGI may mean, for some, a lessening of the income tax paid on Social Security benefits
• As Medicare premiums are based on AGI, QCDs are not subject to the Medicare premium surcharge. Thus, for some a lower AGI could result in a reduction of monthly Medicare premiums withheld from the total SS benefits.

Retirement Plans

Pay attention to the required minimum distribution rules for traditional IRAs.

• Individuals 72 and older must take annual withdrawals or pay a 50% penalty. To arrive at the 2021 RMD amount, start with your IRA balances as of Dec. 31, 2020, and use the tables in IRS Pub. 590-B. The amounts can be taken from any IRA you pick.
• The same rules apply to 401(k)s and similar workplace retirement plans…with two exceptions: First, people who work past 72 can delay RMDs from their current employer’s 401(k) until they retire, provided they own no more than 5% of the firm that employs them. Second, for people with multiple 401(k)s, 403(b)s and the like, the required minimum distribution must be taken from each account.
• If 2021 is your first RMD year, you have until April 1, 2022, to take the RMD. The distribution will still be based on your total IRA balance as of Dec. 31, 2020. If you opt to defer your first RMD to 2022, you will be taxed in 2022 on two payouts: The one for 2021 that you deferred and the RMD for 2022. This doubling up would hike your 2022 income and could push you into a higher income tax bracket.

Many key dollar limits on retirement plans will be higher in 2022

• The maximum 401(k) contribution rises to $20,500. People born before 1973 can contribute an extra $6,500. These limits also apply to 403(b) and 457 plans. The cap on SIMPLEs ticks up to $14,000. People 50 and up can put in $3,000 more.
• Retirement plan contributions can be based on up to $305,000 of salary.
• The paying limitation for defined-contribution plans increases to $61,000.
• Anyone making over $135,000 is highly paid for plan discrimination tests.
• The 2022 paying cap for traditional IRAs and Roth IRAs remains $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and older.
• But the income ceilings on Roth IRA pay-ins go up. Contributions phase out at AGIs of $204,000 to $214,000 for couples and $129,000 to $144,000 for singles
• Also, deduction phaseouts for traditional IRAs start at higher levels, from AGIs of $109,000 to $129,000 for couples and $68,000 to $78,000 for single filers. If only one spouse is covered by a plan, the phaseout for deducting a contribution for the uncovered spouse starts at $204,000 of AGI and ends at $214,000.
• More low-income retirement savers will qualify for the savers’ credit in 2022. The break is for certain individuals who stash money in an IRA 401(k), 403(b), SEP or similar retirement plan. The maximum saver’s credit of $2,000 for joint filers and $1,000 for others is capped at 50%, 20% or 10% of contributions, depending on AGI. For 2022, it fully phases out at AGIs over $34,000 for single filers, $51,000 for heads of household and $68,000 for married couples filing jointly.
• Retirees rehired by their former employers won’t disqualify a pension plan, the Service reminds employers. A rehire because of unforeseen circumstances, such as the coronavirus pandemic, won’t jeopardize the bona fide retirement status of the individual’s former retirement. So, for example, public school districts seeking to address urgent hiring needs can rehire former teachers and other staff who have retired and have begun receiving pension benefits. Also, if the plan permits, those employers may continue receiving the benefits even after they are rehired.
• There’s also this pension rule to help keep older workers on the job: Employees who are at least age 59 or the plan’s normal retirement age can continue to work for the employer and receive in-service pension benefits.

Red Flags that Could Trigger an IRS Audit

We now know that the IRS audit rate dropped to 0.4% of all individual tax returns. That works out to approximately one return out of every 250 filed — and most were low-level correspondence audits. The IRS is auditing fewer returns due to federal budget cuts, and because it has not yet replaced experienced auditors who have retired.

Still, that doesn’t mean you can drop your guard when it comes time to file your return. When returns are filed, they’re scanned into the IRS computer system, which is designed to detect anomalies. If there is an anomaly, that creates a “red flag.” The IRS is more likely to eyeball your return if you claim certain tax breaks, deductions, or credit amounts that are unusually high compared to national standards; you are engaged in certain businesses; or you own foreign assets.

It’s impossible to predict if your return will be selected for an audit, but you would do well to keep the most common red flags in mind:

1. Failing to report all taxable income

Over the years the IRS has received more information from third parties — not only from W2s, 1099s, and brokerage statement information, but also from flow through entities. The computer system compares that information to the return. If there is a mismatch, the computer generates a bill.

2. Earn a lot or very little

The more you earn, the higher the chance the return will be audited. The majority of returns audited are from taxpayers who earn more than $500,000. The IRS has limited staff, and if there is a change on a wealthy taxpayer’s return as a result of an audit the money owed will be greater and the possibility of collection rises. On the other end of the spectrum, taxpayers who reported no adjusted gross income are also flagged, and the audit rate for this group is approximately 2%. The IRS may do a cost-of-living analysis to see how you were able to live on hardly any income. Again, that’s much higher than other income levels.

3. Excessive deductions or credits

The IRS will compare the itemized deductions and credits taken to the average totals for similar taxpayers in the same income bracket. If yours is higher, the IRS may look at the numbers more carefully.

4. Schedule C filers

Sole proprietors and freelancers are entitled to a handful of deductions that most other taxpayers cannot claim, such as home office deductions, mileage expenses, meals, and entertainment expenses — and IRS agents know that self-employed individuals tend to claim excessive deductions. Schedule C filers also sometimes under-report income, so the IRS looks closely at businesses that primarily operate with cash or show a loss. For those businesses, the audit rate in 2019 was between .08% and 1.6%.

5. Non-filers

Addressing high-income non-filers is now the IRS’s top strategic priority. The emphasis is on individuals who earned more than $100,000 but did not file a tax return. As previously mentioned, the IRS compares information they receive from multiple sources to see if returns were filed

6. Claiming 100% business use of a vehicle

The IRS knows that it is rare for someone to use a vehicle for business purposes 100% of the time, especially if they don’t own another vehicle for personal use. The IRS also targets heavy SUVs and large trucks used for business because these vehicles are eligible for more favorable depreciation and expensing provisions. The higher the business use percentage, the greater the IRS scrutiny will be.

7. Claiming a loss on a hobby

You can take a loss on a business, but you cannot claim a loss for a hobby. For a business, the reasonable expectation is to make a profit three out of every five years. If you have a hobby that is set up as a business, make sure to keep supporting documents for income and expenses. If you have multiple years of losses on your Schedule C and you have a lot of income from other sources, the IRS will look at this activity more as a hobby — particularly if you do not depend on the income to make ends meet, or you do not devote the necessary time, effort, and money to maximizing your profits.

8. Home office deduction

Due to the COVID-19 pandemic, many people worked from home in 2020. But most people will not be able to claim the deduction because it’s not available to employees. Prior to 2018, certain employees were able to claim the home office deduction as a non-reimbursed business expense subject to 2% of adjusted gross income

The deduction is still available to self-employed individuals and independent contractors who use a room or space “regularly and exclusively for business.” You do not need to own a home — renters can also claim the deduction. You can claim the deduction through actual expenses incurred, or use a simplified method, which is limited to $5 per square foot with a maximum deduction $1,500

9. Taking an early payout from an IRA or 401(k) account

Special attention is given to payouts before age 59½. Unless an exception applies, these withdrawals are subject to a 10% penalty on top of regular income tax. With so many jobs eliminated in 2020, a lot of people took money out of their retirement accounts

10. Engaging in virtual currency transactions

The IRS using pretty much everything in its arsenal to trace activities of taxpayers who sell, receive, and trade or otherwise deal in bitcoin or other virtual currency. There is now a question on page one of the 1040 return asking about virtual currency activity.

11. Failing to report a foreign bank account

This has been an issue for many years, particularly with taxpayers who have money in nations with more favorable tax laws than the United States. Some foreign banks are obligated to provide the IRS with lists of American clients. There is also a question on Schedule B about foreign bank accounts. If you have more than $10,000 in a foreign account, you are required to file FinCEN Form 114. Foreign assets that amount to more than $50,000 must be reported on IRS Form 8938

12. Claiming the American Opportunity Tax Credit (AOTC)

The cost of a college education continues to rise faster than the cost of inflation. The AOTC is worth up to $2,500 per student for the first four years of college. Forty percent of the credit is refundable, meaning that even if you don’t owe any tax, you get the money back. There are income limitations, and the student must be enrolled at least half-time. Eligible expenses include tuition and books and required fees, but do not include room and board.

You’ll run into trouble if you take the credit for more than four years, omit the school’s ID number on Form 8863, or take the credit without being eligible

13. Engaging in cash transactions

Under the Bank Secrecy Act, various types of cash transactions in excess of $10,000 are required to be reported. The goal is to thwart illegal activities. So, if you make large cash purchases or deposits, be prepared for IRS scrutiny

Conclusion

The above list is not intended to be all inclusive; it’s simply to make you more aware of certain activities can lead to IRS audits. Working with us can help mitigate the risk of being audited — and if you are audited, we are here to help defend you against any potential adverse adjustment.

Please contact us if you have any questions.

 

More Tax Changes

There are lots of tax changes to talk about. The year-end government funding and stimulus law includes many easings for individuals and businesses. Other changes for 2021 reflect prior-year inflation.

Start with a second round of stimulus checks for individuals, structured as tax rebates of $600 for single filers and $1,200 for couples filing jointly, plus $600 more for each child under age 17.

Upper incomers won’t get the payments. They phase out for couples with AGIs above $150,000…$112,500 for household heads and $75,000 for singles.

IRS will look at the 2019 tax return to figure the amount of the payment in most cases. Since this round of payments will be structured in the same manner as before, the Service should have the relevant information for most individuals.

People with direct deposit should have received the money or will get it soon. Paper checks or prepaid debit cards should be in mailboxes by the end of Jan. By law, IRS has only until Jan. 15 to send out this second round of payments.

Technically, the money is an advance payment of a special 2020 tax credit…

The recovery rebate credit. On your 2020 return, you’ll reconcile this payment, along with the check you received in the first round, with the rebate credit allowed. If the credit exceeds the amounts received, you can claim the balance on your 1040. If the payments you got are more than the credit, you won’t have to repay IRS. If you haven’t received a check and you are entitled to one, you can claim the credit when you file your 20202 return. Note that stimulus payments are not taxable.

A batch of tax breaks that were set to expire after 2020 are now extended.

Some were extended permanently, some through 2025 and others for one year.

Among the permanent breaks: The 7.5% adjusted-gross-income threshold for deducting medical expenses on Schedule A. Lower excise taxes on wine, beer and liquor. The deduction for energy-efficient improvements to commercial buildings.

The above-the-line deduction for college tuition is no more after 2020. Lawmakers terminated it and instead increased the income phaseout limits for the lifetime learning credit to match that of the American Opportunity Tax Credit.

Included in breaks extended through 2025: Seven-year depreciation periods for motor sports complexes. The new-markets and work opportunity tax credits. The exclusion from workers’ wages of up to $5,250 of college debit paid by employers. The credit for employers that provide family and medical leave to workers. The exclusion for forgiven debt on a home is lowered from $2 million to $750,000.

Extended through 2021: Deduction for mortgage insurance premiums. A slew of business and energy tax incentives. The limited credit for windows and doors added to one’s residence. Plus, shorter depreciation lives for young racehorses.

Recovery Rebate Credit

Taxpayers who were eligible for an advance payment of a recovery rebate credit, known as an economic impact payment (EIP), but did not receive it can claim a refundable tax credit in the corresponding amount: $1,200 for a single taxpayer or $2,400 for married taxpayers filing jointly, plus $500 per qualifying child under Sec. 24(c). Like the payment, the credit is phased down by 5% of adjusted gross income (AGI) over $75,000 for single individuals ($150,000 for a joint return and $112,500 for a head of household). The second round of economic impact payments, in the amount of $600 per eligible taxpayer, are similarly treated as an advance payment of a refundable tax credit.

The IRS used information from taxpayers’ 2019 or 2018 returns to determine eligibility for the EIP and the bank direct deposit information or address for where to send it; if the taxpayer did not file those returns (and did not use the IRS’s web portal for non-filers) or the return information was lacking or changed, the taxpayer could need to claim the credit. The IRS advises that taxpayers should have received Notice 1444, Your Economic Impact Payment, within 15 days after receiving their payment to confirm it. The IRS also states that when taxpayers file their 2020 tax return they can refer to Notice 1444 and claim additional credits if they are eligible for them. Individuals who received an EIP that was calculated based on their 2018 or 2019 return do not have to repay all or a portion of the EIP they received if, based on their 2020 return, they would qualify for a lesser amount. No credit is allowed to taxpayers who could be claimed as the dependent of another taxpayer (even if required to file a return), to nonresident aliens, or to individuals without a Social Security number valid for employment in the United States.

IRS says forgiven Paycheck Protection Loans are taxable

Mahopac, N.Y., June 23, 2020, by Andy Powers: Congress, when enacting the CARES Act, included a number of small business relief programs that included Payroll Protection Loans that are forgiven if used within the first 8 weeks to cover specific expenses such as utilities and rent as well as payroll costs intended to stimulate employment and the economy. The Act also specifically states that such forgiveness of indebtedness, that would otherwise be considered as taxable income, would be excluded from taxable income by the business. The payroll recipient, however, would include the wages as earned income when filing their personal income tax returns.

IRS disagreed with Congress and soon after the passage of the CARES Act, released Notice 2020-32 which states that no deduction will be allowed a business for any expense paid with forgiven CARES Act funds, which has the same tax effect of including forgiven loan indebtedness as income. As justification, the IRS pointed to Internal Revenue Code Section 265 that refers to denial of double tax benefits.

Senators on both sides immediately took notice, stating that deduction denial of these expenses is contrary to the legislative intent, and on 5 May drafted S.3612-Small Business Expense Protection Act of 2020 which amends the CARES Act to specifically permit the deduction of expenses paid with funds from forgiven PP Loans. As of the date of this writing, the bill has been read twice and referred to the Senate Finance Committee while awaiting Congressional approval. Without such approval, however, the IRS position continues to stand fast, requiring special accounting measures be taken to match expenses against forgiven PPL indebtedness.

IRS Planning a Perfect Storm for American Expatriates not…

Despite IRS several amnesty programs going back to 2012, implemented to encourage Americans living in foreign countries to file delinquent tax returns without the threat of severe monetary penalties and possible criminal charges, some estimates are that as many as 7 million Americans who live in foreign countries have not filed U.S. income tax returns and reports of foreign financial accounts for many years-some never since they moved out of the U.S. Because many of these American expatriates pay their taxes to the country in which they live, and wrongly assumed that they no longer had a U.S. tax filing obligation (as is the case in mostly all countries for citizens with no income from their home country), and were not aware that the U.S. requires that every citizen or permanent resident (green card holder) to file U.S. tax returns, even if they have no U.S. investment or other income or if all of their foreign income is offset by taxes paid to their host country or eliminated by special deductions such as the foreign earned income exclusion. Whatever the reason, the IRS has provided opportunities for American expats to bring their taxes up to date without penalties or significantly reduced penalties provided that the delinquency was not due to willful intent (to hide money and evade paying U.S. taxes), and they have been extremely lenient as far as excuses by including “a misunderstanding of the law” when there was minimal taxes owed and faxes were filed under the amnesty programs and brought up to date. For those who owed relatively small amounts or no U.S. income tax due to special exclusions, deductions or foreign tax credits and other double tax avoidance relief, the initial amnesty program from 2012 was enhanced in 2014 with the Streamlined Procedure that increased the amount of tax due and other provisions before the returns would be required to be filed through an attorney under the Overseas Voluntary Disclosure Program (OVDP). Under the Streamlined Program all the IRS wants to see (regardless of how delinquent someone is) is three delinquent prior year income tax returns and foreign bank account reports (FBARS) for the prior six years.

The IRS has always made it clear that these amnesty programs were not indefinite, and that someday they would be closed without advanced notice. The word is that the IRS Commissioner stated at a conference last year that the Streamlined Program may be coming to an end sooner than later. Another possibility is that the program could be modified for a short time before coming to an end whereby the number of past due income tax returns was increased from 3 to 5 in tandem with new program for Americans who renounce their citizenship.

According to my sources, due to the U.S. economic stimulus costs resulting from Covid-19, adding trillions of dollars to the U.S. deficit, the IRS has been given marching orders to begin preparing to mobilize rapidly to collect taxes, fines and interest from American expatriates residing in foreign countries outside the U.S. Now that the implementation of the Foreign Account Tax Compliance Act (FATCA) , legislated in 2010, is virtually finalized, the IRS has the resources to identify mostly all Americans with financial accounts maintained in foreign countries. Foreign banks and financial institutions of all types, in all major countries around the world, have given notification to American account holders that they are required to provide social security numbers, or their accounts will be closed. As a hammer, FATCA requires that U.S. investment income of non-participating foreign financial institutions are subject to a 30% withholding of U.S. tax. Not only does the IRS know the identity of Americans with foreign bank accounts, and have now matched them against the database of people who have either filed or not filed U.S. income tax returns and required foreign bank and financial account reports, but the IRS is also exchanging information with participating foreign revenue agencies and informing them of citizens of their country with U.S. financial investments and bank accounts. The U.S. database of Americans with delinquent tax returns who have foreign accounts is now being substantially enhanced through the process of issuing Covid stimulus payments.

Participating financial institutions of treaty countries have been exchanging information regarding foreign account holders now for several years; however now that the database is virtually complete, Congress may very well grant the IRS request to expand their budget for the purpose of using the information in the FATCA database to locate delinquent U.S. taxpayers and prepare substitute tax returns whereby the tax is determined based on gross income, without deductions at the highest rates, along with penalties and interest to within the near future. This process is now significantly simplified for the IRS with their new computer programs and can be implemented without a substantial increase in personnel.

So as the storm clouds converge, exacerbated by this Covid-19 deficit, it may well be prudent for American expatriates who are delinquent in filing their U.S. tax returns, FBARs and paying U.S. tax owed to IRS on income not taxed by foreign countries, to speak to seek assistance from a competent U.S. International tax specialist who can help get them caught up now, before the window of opportunity to file for only a few years, without penalty, is closed. For those who don’t know, there is no statute of limitations preventing the IRS from assessing tax and penalties against an American when there was no tax return filed. Just think of it from the Treasury Department’s view. If they close the program and collect only $1,500 from 7 Million Americans (including “accidental Americans”, that is $10.5 Billion. Not nearly enough to cover the costs but enough to cover the first year’s interest on the debt that is attributable to the pandemic.

If you are an American expat who is behind in filing U.S. returns, I suggest that you tackle this now before it is too late. Also, to add salt to the wound, during the past years Penalties have been imposed even when there is no tax due, and the penalties for not filing these foreign bank information reports could amount to tens of thousands of dollars or more.

Local Business and LifeSize Collaborate to Help Night Terrors…

Mahopac, N.Y.: In response to caused by the spread of Covid-19, LifeSize, a video and audio telecommunications company based in Austin, Texas, is making available to health and other organizations, businesses, NGO or governmental agencies 6 months free enterprise grade high definition, fully secure with end to end encrypted video conferencing service.

Andrew Powers, owner and CEO of local Mahopac based tax and business advisory service firm Powers & Company, is coordinating with LifeSize CEO Craig Malloy to bring this service to local preschoolers and other youths symptomatically struggling with sudden isolation from their fellow students, teachers, educational aids and other daily shared routines by bringing these LifeSize services to local preschools and other educational institutions as well as social service agencies struggling to support children, seniors and other community members.

As reported by the United Nations Children’s Fund (UNICEF)The National Child Traumatic Stress Network (NCTSN), an organization founded by The U.S. Congress, along with many renown children’s hospitals and organizations, millions of children are being traumatically effected by sudden changes in their lives brought about by mandatory isolation resulting from this deadly virus. Associated with sudden disruption of normal daily activities and disconnect from their fellow students, friends, teachers, aides and others including cousins, grandparents and such, children are suffering abnormal night terrors that, along with fears and confusion associated with quarantines and isolation, have been determined to be extremely developmentally harmful.

Ava Lee Updegraff, Mr. Powers’ 4 year old granddaughter who attends the Creative Kids Preschool, was reported by her mother Michelle as having suffered recurring dreams that she awakens to find that her parents are gone and that she is totally alone. Deeply concerned regarding Ava’s emotional wellbeing, combined with the fact that Mr. Powers was aware that numerous cases are being reported of adults experiencing abnormal and vivid dreams, they decided to look into this further only to find that this was a major concern for toddlers and young adults.

These children need something to take their minds off this situation along with a means of mitigating the trauma. It was Mrs. Updegraff who arrived at the idea of scheduling sessions whereby toddlers such as her daughter, Ava, could collaborate with her friends from school as well as her teachers and other preschool workers who had become engrained as a part of her daily routine.

Having shared this thought with her father, Mr. Powers then contacted Craig Malloy of LifeSize to see what could be done to streamline and expediate utilization of the collaboration video conferencing services that LifeSize was making available.

Although this is only one means of addressing the problems faced by our youths, it is a major step in the right direction and hopefully will inspire other ideas as well.

Mr. Powers of Powers & Company can be reached at 914-393-1377. For further information regarding how you can take advantage of this offer from LifeSize, or for further information regarding either the company or their services including their renown collaboration video conferencing and other A/V telecommunications services, visit www.lifesize.com or call 877-347-7933.

CARES (Coronavirus Aid, Relief and Economic Security) Act-Tax Changes…

April 1, 1920..Although the CARES Act is comprehensive and exhaustive, most Americans today want to know what it means to them, Much has been said regarding the stimulus checks that most Americans will be receiving. Well here it is in a nutshell. If your Adjusted Gross Income (per your last filed tax return) is below $75,000 for those who file as Single, $150,000 if Married Filing Jointly, or $112,500 if Head of Household, you will receive as a direct deposit into the bank account used to file your tax return, or you may enter it in a special IRS website, or the check will be mailed if an account number is not available, the sum of $1,200 per person. This does NOT apply to those who are claimed as dependents of other taxpayers, and if you did not earn enough to file a tax return AND collected Social Security benefits, you will receive a payment. Taxpayers with qualified children will receive an additional $500 for each child.

It is important to note that this is adjusted gross income (AGI), not “modified” AGI, meaning say an American living and working in a foreign country who had foreign earned income of $105,900 plus $75,000 of other income, totaling $180,900, but excluded $105,900 of the foreign earned income, is entitled to receive the full $1,200  rebate and it will be deposited to their bank account. Now that the bill was signed into law, it will take an act of Congress to amend the law to close that loophole.

The amount of the stimulus rebate gradually decreases as the adjusted gross income exceeds the limits stated above to the extent of $50 for every $1,000 above the limit. There are some interesting and important particularities, however. Anyone NOT receiving social security benefits who has not filed a tax return (possibly because they don’t earn enough to require a tax return) will not receive benefit checks until they file a tax return.

Other provisions are that any INCOME tax return that is normally due on April 15 is now extended to July 15, both regarding relief from filing and payment of tax due penalties (and interest). However if you had a child born in 2019 the rebate amount won’t increase for that $500 until the 2019 return is filed.

Also if a child was born at the end of 2019 outside the United States, and the parents did not come to the States to get a social security number for the child (U.S. foreign embassies stopped issuing social security numbers in 2017), and are now quarantined and prohibited from flying to the U.S., they also need to wait to file their 2019 tax return (extend until October 15?) or else they can’t get the stimulus rebate until next year after they file for 2020. OH, but WAIT, CONGRESS put a deadline for claiming the rebate until December 31, 2020. So you can’t wait until next year.

Federal emergency unemployment benefits are available for those who are both unemployed or partially unemployed due to the coronavirus. This includes self employed individuals.

Business employers that do not receive Small Business Interruption loans can take a 50%  tax credit on the wages paid to employees from March 13 to December 31, 2020, up to a maximum of $5,000 credit per employee (applied to $10,000 of employee wages). To qualify, firms must be suspended due to government actions related to coronavirus or experience a 50 percent decline in gross receipts during a calendar quarter when compared to the same quarter in the previous year. For firms with 100 employees or more, the credit can only be applied to employees not able to do their duties due to a business suspension or a lack of business

Also federal employment payroll taxes will be deferred for 2020. Fifty percent of payroll tax payments for 2020 will be due in 2021, with the other 50% due in 2022.

Business operating losses for this year can be carried back for up to five years.

Excise taxes on alcohol used to produce hand sanitizer will be suspended for 2020.

The plan allows people to take special disbursements and loans from tax-advantaged retirement funds (IRA plans) of up to $100,000 without facing a tax penalty. It waives the required minimum distribution (RMD) rules for 401(k) plans and individual retirement accounts (IRAs) and the 10% penalty on early withdrawals up to $100,000 from 401(k)s. Account holders would be able to repay the distributions over the next three years and be allowed to make extra contributions for this purpose. These measures apply to anyone directly affected by the disease itself or who faces economic hardship as a result of the pandemic.

Unemployment Benefits: The stimulus plan extends both the eligibility and the benefit amounts for unemployment related to the current emergency. Eligibility for unemployment benefits is extended to those who would otherwise not qualify, if their loss of work is related to the Covid-19 pandemic. This includes contractors and the self-employed, those whose existing benefit has been exhausted, those only seeking part-time employment, those with insufficient employment history, or anyone who would otherwise not qualify. However, it specifically excepts those who have the ability to continue their job working remotely online or are already paid sick leave or other leave benefits due to the work interruption. The plan dramatically expands eligibility for unemployment benefits just as new unemployment claims are skyrocketing. Nearly everyone but remote online workers and those already on paid leave will be eligible. The plan extends the duration of regular unemployment benefits from the normal 26 weeks to as long as 39 weeks for affected workers. It extends payment of benefits also to the first week of unemployment, where not prohibited by state laws. It also funds a new Federal Pandemic Unemployment Compensation benefit of $600 per week on top of the regular unemployment benefit through the end of July 2020. For workers who remain employed but with reduced hours, the stimulus plan funds 100% of state short-term compensation benefits and provides incentives for states that do not have such benefits to implement them.

Although there are many more aspects to the CARES Act, these are some of the paramount provisions that the average American is concerned with.

2020 Special Tax Extension IS NOT AUTOMATIC

March 18, 2020…Mahopac, N.Y.: Although not yet announced by the IRS, The White House announced yesterday that 2019 individual income tax liability payments that are otherwise due April 15, 2020 are extended until July 15, 2020 and that there will be no penalties interest due on the balance owed for the 2019 return, provided the money is paid by July 15. THIS DOES NOT MEAN THAT EITHER AN EXTENSION TO FILE OR A TAX RETURN IS NOT REQUIRED BY APRIL 15. By April 15 all persons that have tax returns due by the April 15 filing date must file either a tax return or and extension to file no later than April 15 in order for the “penalty waiver” to be effective. Although not yet announced, I presume this will mean that if a tax return is filed late and a tax balance due exists, that a late filing penalty of 5% per month of the tax owed could be charged by the IRS. Also it is unknown at this time if this means that the IRS can charge penalties and interest if a return or extension is not filed.

Our tax clients are advised to contact us as soon as possible to make arrangements to provide us with their tax documents and information as soon as possible. The home page has our 2019 Tax Organizer for guidance. Documents can be scanned to a password encrypted file and emailed to us, or arrangements can be made for the scanned file to be placed in an encrypted internet Drop Box, or they can be mailed to our Post Office Box address.

If extensions are necessary, contact us either by email or telephone so that arrangements can be made.

To ensure that everything is properly processed, kindly DO NOT wait until the last minute.

Beware, your college student may not qualify for parents…

IRS computer software has become extremely sophisticated in recent years enabling cross checking of social security numbers and comparing information reported on tax returns filed by social security numbers. Although full time undergraduate students under the age of 24 have usually been considered qualified dependents of their parents, increasing costs of higher education and living expenses, college students are finding it harder to attend college full time without working more part time hours, and this additional income may trigger IRS computers to raise a questions as to whether or not the parents met the 50% support test to enable them to take the tax credit for other dependents on their personal income tax returns. And don’t think that it is a “given” that the parents provide half of their college student’s support, this needs to be calculated. Now keep in mind that this does not mean that a child in college can’t earn extra money and save this money to use in the future; they just can’t use it pay half their support. In order to qualify for the Other Dependent Credit (ODC), the IRS prescribes certain tests and calculations that need to be performed in order to be satisfied that the PARENT claiming the ODC has met the 50% support test (in addition to the other rules such as residing with parents other than temporary absences) . To calculate the support test two factors are involved. Probably the most important is to know the total cost of the student’s tuition, books, on campus living, extracurricular activities, food, clothing, transportation, medical, dental and the FAIR MARKET VALUE of lodging at home, personal hygiene products, etc. Then one needs to determine how much of these expenses were paid by the student and the parents. The cost of living and attending colleges and universities has increased dramatically over the past two decades. The cost of obtaining an advanced degree is becoming extremely expensive in recent years. Tuition and fees vary from college to college. Among ranked National Universities, the average cost of tuition and fees for the 2019–2020 school year was $41,426 at private colleges, $11,260 for state residents at public colleges and $27,120 for out-of-state students at state schools, according to data reported to U.S. News in an annual survey. When it comes to costs, the average tuition and fees to attend an in-state public college is a third of the average sticker price charged at a private institution. This is your starting point in determining the cost of support. Along with the general cost of living, tuitional costs vary based on the location. I believe that the best advice is for parents of children who are enrolled full time in higher education institutions is to maintain good records. Keep careful track of tuition payments, the cost of books, extracurricular activities, clothing purchases, meals eaten on campus as well as those provided at home for the student dependent, transportation both to and from school as well as school activities. If the student commutes and requires an automobile, keep track of the annual cost of the vehicle and other transportation costs. Although the cost of on or off campus residence is easier to determine, probably one of the most difficult expense items is determining the cost of maintaining the residence that is available to the student while not attending school, or if they are commuting. The IRS refers to Fair Rental Value. That may require that you either keep track of the cost of maintaining your home, and apportioning the amount of square footage used by the student child, including your mortgage payments, taxes and insurance. Alternatively, you may want to determine what it would cost to rent a residence. Let’s look at an example. First determine what the fair market value of a residence for the child would be (assuming they live with you). Say that is $14,000 yearly. Then add the cost of utilities and insurance apportioned to the child when it is actually used. Then add the other costs mentioned (including the actual cost of either an on or off campus residence, and let’s assume that is another $13,000, which when all is tabulated is $27,000 per year. Add to that the cost of tuition, books, lab fees, etc. which may be another $25,000. That brings you to $52,000, and 50% is $26,000. So, if the student earns $15,000 after taxes and you make up the difference, then it is a no brainer. But what if the costs are only $14,000 and the student earns a net (after tax) of $15,000, Then it is necessary to determine if the parents pay 50% of the cost. As you see it gets complicated. So when you do your tax return, or if you go to a paid preparer who asks you the support question as part of their due diligence requirement, be prepared by keeping good records of costs, expenses and who pays what. Should the IRS (or state) ever challenge you on the support issue, and you cannot satisfy the requirement, or if you ignore the letter, you may face losing the credit for that year and future years as well, not to mention that they could go back three years. A word of caution on the AMERICAN OPPORTUNITY TAX CREDIT. This can only be taken for 4 years. After that, there is possibly the Lifetime Learning Credit. But don’t get caught short by claiming the AOTC for more than 4 years, as again not only will you need to pay it back, but face penalties as well.

Wealth Tax – This Election’s Misleading Political Football

We’re hearing a lot about “wealth taxes” from the 2020 Democratic presidential candidates. But a wealth tax is still a bit of a mystery to most Americans, since the idea is new in the U.S. Some people are also concerned about the impact on the economy if such a tax is ultimately imposed. So let’s take a look at the wealth tax proposals from two of the leading White House contenders…And the chances of a wealth tax becoming law if the Democratic nominee is elected president in November. First up: Mass. Senator Elizabeth Warren’s plan. Her “ultramillionaire tax” would give Uncle Sam 2% of a household’s total net worth above $50 million…6% on net worth above $1 billion. Total net worth would consist of all worldwide assets, including residences, businesses, trusts, retirement funds and personal property worth $50,000 or more. Assets held by minors would count, too. People with liquidity issues could defer payment of the tax for up to five years. IRS audits of wealthy individuals would rise. She also wants to levy a 40% “exit tax” on the net worth above $50 million of Americans who renounce their U.S. citizenship. Vt. Senator Bernie Sanders plan is more ambitious. He is calling for a 1% tax on married couple’s net worth above $32 million. The rate would gradually increase to 8% on wealth over $10 billion. Tax bracket ranges would be cut in half for singles. There would also be a 40% exit tax on the net value of all assets under $1 billion…60% over $1 billion…for wealthy expats trying to avoid the tax. IRS would be required to audit 30% of wealth tax returns for anyone in the 1% bracket and 100% of returns from billionaires. A national wealth registry would also be formed to help enforcement, Will we have a wealth tax if a Democrat is elected president? Probably no. There would be political hurdles. Even if the Democrats gained the majority in both houses of Congress, it would still be extremely hard to get enough law makers to vote for a wealth tax. As the recent debates have shown, many Democrats are not on board with the idea. Plus, if the Republicans hold on to the majority in the Senate, any wealth tax passed by the House would be dead on arrival in the upper chamber. The courts might also strike down a wealth tax law. Legal scholars are split on whether such a tax is constitutional. The U.S. Constitution requires a “direct tax” to be apportioned among the states according to their population. So, for example, since California has twice as many people as N.Y., California residents would have to pay twice as much as N.Y. residents. If a wealth tax is enacted and isn’t apportioned properly, the courts would have to decide whether it is a direct tax. If so, it’s unconstitutional. Democrats would still have other options for raising taxes on the wealthy…If a wealth tax is not in the cards. Among the more viable plans offered up by White House candidates: Raising the top income tax rate back to 39.6%…or higher. Doing away with the step-up in basis for inherited property. Ending favorable tax rates for long-term capital gains. And lowering the estate tax exemption to $3.5 million or so.

We’re hearing a lot about “wealth taxes” from the 2020 Democratic presidential candidates. But a wealth tax is still a bit of a mystery to most Americans, since the idea is new in the U.S. Some people are also concerned about the impact on the economy if such a tax is ultimately imposed. So let’s take a look at the wealth tax proposals from two of the leading White House contenders…And the chances of a wealth tax becoming law if the Democratic nominee is elected president in November. First up: Mass. Senator Elizabeth Warren’s plan. Her “ultramillionaire tax” would give Uncle Sam 2% of a household’s total net worth above $50 million…6% on net worth above $1 billion. Total net worth would consist of all worldwide assets, including residences, businesses, trusts, retirement funds and personal property worth $50,000 or more. Assets held by minors would count, too. People with liquidity issues could defer payment of the tax for up to five years. IRS audits of wealthy individuals would rise. She also wants to levy a 40% “exit tax” on the net worth above $50 million of Americans who renounce their U.S. citizenship. Vt. Senator Bernie Sanders plan is more ambitious. He is calling for a 1% tax on married couple’s net worth above $32 million. The rate would gradually increase to 8% on wealth over $10 billion. Tax bracket ranges would be cut in half for singles. There would also be a 40% exit tax on the net value of all assets under $1 billion…60% over $1 billion…for wealthy expats trying to avoid the tax. IRS would be required to audit 30% of wealth tax returns for anyone in the 1% bracket and 100% of returns from billionaires. A national wealth registry would also be formed to help enforcement, Will we have a wealth tax if a Democrat is elected president? Probably no. There would be political hurdles. Even if the Democrats gained the majority in both houses of Congress, it would still be extremely hard to get enough law makers to vote for a wealth tax. As the recent debates have shown, many Democrats are not on board with the idea. Plus, if the Republicans hold on to the majority in the Senate, any wealth tax passed by the House would be dead on arrival in the upper chamber. The courts might also strike down a wealth tax law. Legal scholars are split on whether such a tax is constitutional. The U.S. Constitution requires a “direct tax” to be apportioned among the states according to their population. So, for example, since California has twice as many people as N.Y., California residents would have to pay twice as much as N.Y. residents. If a wealth tax is enacted and isn’t apportioned properly, the courts would have to decide whether it is a direct tax. If so, it’s unconstitutional. Democrats would still have other options for raising taxes on the wealthy…If a wealth tax is not in the cards. Among the more viable plans offered up by White House candidates: Raising the top income tax rate back to 39.6%…or higher. Doing away with the step-up in basis for inherited property. Ending favorable tax rates for long-term capital gains. And lowering the estate tax exemption to $3.5 million or so.

I’ve often heard comparisons to health care costs and social benefits in Scandinavian countries such as Norway versus the United States. Well, there is an old saying. You get what you pay for (but often there is a catch). The Wealth Tax in Norway is .85% of the value of all worldwide property owned over about US$ 170,000. ALL property includes the value of retirement accounts-everything. So if you have a 401(k) plan that is worth $1 Million, plus a house with equity of $250.000 and maybe $50,000 in savings, each year Norway takes $11,000 in wealth tax on top of taxing your annual income at 40%. Presently there is no Wealth Tax in the U.S., our income tax rates are substantially lower that Scandinavian countries , and the wait time to see a doctor or undergo a medical procedure is substantially less in the U.S. Presently that wait time to see a GP in Norway is about a week, a specialist can be several weeks and a medical (including) surgical procedure can take months, depending on the procedure. Also, the population of Norway is equal to that of Alabama and Scandinavia is about that of Georgia.

I have a client, an American, who has lived and worked in Norway for a long time and paid the very high taxes. However when he needed surgery, he chose doctors and hospitals located in the United States and paid them out of pocket.

Now a major problem that I now see in America is the fact that if we check the numbers of high earners versus the uneducated and under employed here in the U.S., I can see that we could be starting to slant to a point where the income tax paid by Americans cannot be apportioned among the states based on population.

IRS Wants Your Retirement Money-Contact Your Tax Advisor NOW!

Congress recently passed the Secure Act which, although it has many positive points, impacts EVERY person with a qualified retirement plan such as an IRA or 401(k). Effective 1/1/2020, with the exception of surviving spouses and certain disabled persons, anyone who inherits funds from a qualified retirement account must withdraw the money over ten years or face a whopping tax bill in year ten or worst yet, be locked out of the account. Under present law, under the “stretch” provisions,  these monies can be rolled to a new IRA with an election to distribute the money over the beneficiaries life expectancy. Thus the annual payments are smaller, possibly extended over a much longer time, with thousands less paid in tax.

For example, assume a wage earner with a 401(k), IRA or similar plan, who wants to bequeath the funds to her children or grandchildren or others (other than their spouse-if married). The 30 year old beneficiary, instead of making an election to spread the distributions and the tax bill over their life expectancy, must now take it over ten years or less, probably paying thousands more in income tax, and possibly risk losing the money remaining if not withdrawn in ten years.

Obviously, it is time to start discussing options with your tax advisor NOW.

Attention Employers: New Forms I-9 and W-4: Requirements and…

Federal law requires that every employer who recruits, refers for a fee, or hires an individual for employment in the U.S. must complete Form I-9, Employment Eligibility Verification. The Form I-9 process, managed by the U.S. Citizenship and Immigration Services, will help you verify your employee’s identity and employment authorization. Also in 2020, the IRS has issued the new W4, which change the ways workers will be calculating their withholding for federal income tax purposes. The I9 and W4 forms are payroll forms that employers MUST RECEIVE during the hiring process. Employers take a high risk not obtaining them prior to employment. The IRS and the USCIS both have specific rules on how to obtain, verify and process these forms. In some cases, penalties for I9 non-compliance can result in jail time, as well as Homeland Security, the FBI, an USCIS immigration audits. If you don’t use the new W4, it could result in your company being reviewed for under or over withholding federal income tax.

For complete information visit the USCIS site at www.uscis.gov/i-9-central

Avoiding penalties for late tax filing and payment of…

Although for some, filing their tax return to obtain a refund is a priority, there are those who procrastinate until the last minute, often missing the deadline for filing. For some, this has not been a problem over the years as they ended up receiving refunds for overpaid taxes. However, under the new tax law, many were surprised in that not only were their refunds lower than in prior years, they actually owed money, and of course late penalties and interest. To avoid such costly situations, we urge clients to begin compiling their tax information in December (unless self employed or with income without withholding tax, in which case this is a year round process with quarterly estimated tax payments due). Although documents from third parties are not received until the new year, we suggest that a list of all income sources be prepared and maintained so you know what documents to look for.

Although the brokerage firms are much better now that they have been recording the client’s cost basis for securities held and sold, there are times when investment shares are transferred from other accounts, sometimes these are inherited investment shares with no record of purchase or cost. This requires lengthy legwork in order to determine gain or loss, and if left to the last minute, can cause the tax return to be filed late. In cases where the returns are put off and never filed, the IRS can not only file a substitute return based on third party information, IRS will not account for cost basis and over assess tax (and penalties and interest). The IRS can enforce collection procedures regardless of whether the tax is right or wrong. And if there is a tax overpayment, after three years the IRS does not have to (and won’t) refund the money, nor will they apply it to subsequent returns that show a balance due. So for those returns, thee is the additional tax owed, plus a hefty penalty and interest charge, with no offset for refunds for prior year returns not filed.

The normal penalties are listed below. In cases where a return is filed but third party information shows that additional income was paid and not reported by the taxpayer, often the IRS computer will assess a 20% Accuracy Related Penalty (sometimes as high as 40%).

According to the IRS website, interest and penalties (other than the ARO (above) are as follows:

INTEREST: When you file your tax return late, you’ll be charged interest on any unpaid balance and you may also be subject to failure-to-file and failure-to-pay penalties. Interest accrues on the unpaid balance and compounds daily from the due date of the return (without regard to any extension of time to file) until you pay the balance in full. The interest rate for taxpayers other than corporations is the federal short-term rate plus 3%. The federal short-term rate is determined every three months. For the current quarterly interest rate on underpayments, search “interest rates” in Newsroom Search or “quarter interest rates” on IRS.gov.

PENALTIES:

Failure-to-pay penalty is charged for failing to pay your tax by the due date. The late payment penalty is 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%. You won’t have to pay the penalty if you can show reasonable cause for the failure to pay on time, however the reasonable cause exceptions are extremely limited but at the end of the day, it is really up to the discretion of the IRS agent from whom you request penalty relief. Note that there is a magic wand (or silver bullet) for those who were never assessed a late penalty before and this is a first time penalty. In that case, there is no reasonable cause required. It is a first time “mulligan” . Then there are additional penalties if the IRS sends you a notice before you file, and those notices are ignored. . 10 days after the IRS issues a final notice of intent to levy or seize property, the 0.5% rate increases to 1% per month. The penalty rate is 0.25% for each month or part of a month in which an installment agreement is in effect. Failure-to-file penalty is charged on returns filed after the due date or extended due date, absent a reasonable cause for filing late. The failure-to-file penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won’t exceed 25% of your unpaid taxes. If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month or part of a month that your return was late, up to 25%. The late filing penalty is calculated based on the tax that remains unpaid after the due date. Unpaid tax is the total tax shown on your return reduced by amounts paid through withholding, estimated tax payments, and allowed refundable credits. If after five months you still haven’t paid, the failure-to-file penalty will max out, but the failure-to-pay penalty continues until the tax is paid, up to 25%. The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of the tax. If your return was over 60 days late, the minimum failure-to-file penalty is the smaller of $210 (for tax returns required to be filed in 2019) or 100% of the tax required to be shown on the return.

So be smart, always file your tax return in a timely manner and even if you anticipate not being able to file on time (with or without an extension), prepay the entire tax due as no penalty can be assessed against a return where the tax is overpaid. Be cautions though, as even though you may show a tax overpayment that includes credit for taxes overpaid and applied from a prior year, if there is a problem with the prior year tax return that eliminates that overpayment, you can find yourself short in the current year.

If you don’t have the money to pay the tax owed on the tax return and you qualify for an installment payment plan, file on time and attach an installment payment plan request. You will pay a fee for this and continue to pay interest and penalties, but at least you will be current and the IRS collection enforcement will not be hounding you. They key is to file on time and pay back the tax owed as soon as possible to minimize the penalties and interest. As a very last ditch, if you don’t qualify for an installment plan, it is always best to file a tax return without the payment and then pay the tax owed as soon as possible. At least you avoid the hefty 4.5% monthly late filing penalty and only left with the .5% per month late payment fee.

NYS Mandated Employer Sexual Harassment Law

NO LATER THAN OCTOBER 9, 2019, EMPLOYERS WITH AS FEW AS ONE (1) EMPLOYEE WORKING ANYWHERE IN NYS ARE MANDATED TO HAVE PROVIDED EMPLOYEES WITH MANDATED INTERACTIVE SEXUAL HARRASSMENT TRAINING THAT MEETS MINIMIMUM STANDARDS AND ADOBT A SEXUAL HARRASSMENT POLICY THAT INCLUDES ANNUAL INTERACTIVE TRAINING. FOR MORE INFORMATION VISIT THE NYS WEBSITE AT:

https://www.ny.gov/programs/combating-sexual-harassment-workplace

According to the NYS law, the minimum standards are:

Every employer in the State of New York is required to adopt a sexual harassment prevention policy pursuant to Section 201-g of the Labor Law. An employer that does not adopt the model policy must ensure that the policy that they adopt meets or exceeds the following minimum standards. The policy must: i) prohibit sexual harassment consistent with guidance issued by the Department of Labor in consultation with the Division of Human Rights; ii) provide examples of prohibited conduct that would constitute unlawful sexual harassment; iii) include information concerning the federal and state statutory provisions concerning sexual harassment, remedies available to victims of sexual harassment, and a statement that there may be applicable local laws; iv) include a complaint form; v) include a procedure for the timely and confidential investigation of complaints that ensures due process for all parties; vi) inform employees of their rights of redress and all available forums for adjudicating sexual harassment complaints administratively and judicially; vii) clearly state that sexual harassment is considered a form of employee misconduct and that sanctions will be enforced against individuals engaging in sexual harassment and against supervisory and managerial personnel who knowingly allow such behavior to continue; and viii) clearly state that retaliation against individuals who complain of sexual harassment or who testify or assist in any investigation or proceeding involving sexual harassment is unlawful. Employers must provide each employee with a copy of its policy in writing. Employers should provide employees with the policy in the language spoken by their employees.

New York State Allows Deductions Not Allowed Under Federal…

The Tax Cuts and Jobs Act of 2017 (TCJA) made significant changes to personal income taxation. In response to the federal tax law changes made under the TCJA, New York State has decoupled from certain income tax changes. This is an overview of how some of these critical changes will impact the upcoming tax season:

Itemized Deductions Taxpayers may choose to itemize their deductions for New York purposes for tax years 2018 and after, even if they do not itemize on their federal income tax return. In addition, New York allows several deductions that are no longer available for federal purposes, such as the following: • State and local real estate taxes paid, including amounts over the $10,000 federal limit. • Casualty and theft losses, including those incurred outside a federally declared disaster area. • Unreimbursed employee business expense. • Certain miscellaneous deduction, such as tax preparation fees, investment expenses, and safe deposit box fees. To end this New York State has created Form IT-196 for New York residents to report their allowable itemized deductions.

Medical and Dental Expenses For federal purposes, medical and dental expenses can be deducted only if the expenses are more than 7.5% of federal adjusted gross income (AGI). For New York purposes, medical and dental expenses can be deducted if the expenses are greater than 10% of federal AGI.

Interest Expenses: Home mortgage and home equity interest deductions, for federal purposes, have changed for the 2018 tax year; however, New York will follow the federal 2017 rules for such deductions. Alimony or Separate Maintenance Payments When calculating the New York AGI, taxpayers who have alimony or separate maintenance payments made under and alimony or separation agreement that was executed or modified after December 31, 2018, are required to: • Subtract from federal AGI any applicable alimony or separate maintenance payments made in the tax year, and • Add to federal AGI any applicable alimony or separate maintenance payments received in the tax year.

Moving Expenses and Reimbursement New York will continue to allow taxpayers to exclude from their New York AGI any qualified moving expenses and reimbursement for moving expenses that are not deductible or excludable under the TCJA. When calculating New York AGI, taxpayers should subtract from federal AGI: • Any applicable qualified moving expenses reimbursement received in the tax year, and • Any qualified moving expenses paid during the tax year.

Section 529 College Savings Account Plan Withdrawals from a qualified tuition program account established under section 529 of the Internal Revenue Code for kindergarten through 12th grade school tuition, which now qualify under the TCJA, are not qualified withdrawals under the New York 529 college savings account program. A withdrawal is nonqualified if the withdrawal is actually disbursed in cash or in-kind from a New York State 529 college savings account and the funds are not used for the higher education of the designated beneficiary. Higher education generally means public or private, nonprofit, or proprietary postsecondary educational institutions in or outside New York. Therefore, any withdrawal from a New York 529 college savings account used to pay tuition in connection with enrollment or attendance in elementary or secondary public, private, or religious schools is a nonqualified withdrawal.

Change to the Empire State Child Tax Credit Taxpayers may no longer use the amount of the current tax year’s federal child tax credit or additional child tax credit to compute the Empire State Child Tax Credit for New York. The Empire State Child Tax Credit is based on the 2017 federal credit amounts and income