Spring is here, tax season is in full swing …
And readers are peppering us with questions.
Will RMDs be waived for 2021? No. The CARES Act halted required minimum distributions from IRAs and 401(k)s for 2020. An extension of the waiver wasn’t included in the latest stimulus law.
People age 72 and older must take RMDs for 2021 by year-end, with two exceptions. Individuals who turn 72 this year can postpone taking their payout until April 18, 2022. And people who work past 72 can delay RMDs from their current employer’s 401(k) until they retire, provided they don’t own more than 5% of the firm that employs them.
Will federal lawmakers pass retirement savings legislation this year or next?
It’s a good bet. In late 2019, Congress passed the bipartisan SECURE Act to help participants in workplace retirement plans and IRA owners. Lawmakers at the time said they weren’t done and have since proposed more changes.
Included in a bipartisan proposal: Upping the age for taking RMDs from 72 to 75. Allowing people age 60 and older to contribute more to their 401(k)s. Expanding qualified charitable distributions from IRAs by raising the annual cap to $130,000 and allowing QCDs from 401(k)s. Also, increasing the saver’s credit.
What are the federal income tax consequences from selling a timeshare?
Losses from the sale of timeshares held for personal use are nondeductible. If you’re one of the lucky few that sells a timeshare at a profit, you have capital gain. Different tax rules apply to sales of timeshares held for rental or mixed use.
What are the odds that the corporate tax rate will be increased? Decent.
President Biden wants business tax hikes to pay for his infrastructure plan.
Among his proposals: Raising the tax rate on regular corporations (C corps) from 21% to 28%. Ending tax subsidies for oil and gas firms. Having U.S. multinationals pay more in federal taxes. Plus ramping up IRS audits of large corporations.
Biden’s plan is bound to evolve over the next few months. There are obstacles Democratic lawmakers will have to overcome before enacting business tax increases, including the political climate, opposition from business lobbying groups and the GOP, and the idea that raising taxes before the economy fully recovers is potentially risky. That said, at the end of the day, it wouldn’t surprise us to see Congress raise the rate on C corps to around 25% or so. We don’t expect any tax increases to apply for 2021.
If higher taxes for individuals are enacted this year, will they be retroactive?
We don’t think so. Biden and some congressional Democrats support tax hikes for upper-incomers. Although Biden’s infrastructure plan doesn’t include provisions on individual or estate taxes, look for him to release his ideas in the next month or so. It’s too soon to tell whether Democrats could even pass tax hikes on individuals. But even if they do, any changes likely would take effect in 2022 or possibly even later.
Individuals have until May 17 to file Form 1040 or 1040-SR and pay taxes. You needn’t file for an extension: The one-month delay is automatic. If you are not ready to file by May 17, you can get an extension to Oct. 15.
Many states have extended their tax filing deadlines to May 17, too.
But not all, so be sure to check your state tax agency’s website for details.
Use IRS’s online Get Transcript tool if you need data from a return you lost. You can print a summary of key tax information. People seeking copies of actual returns can’t use the tool. They must mail Form 4506 to IRS and pay $43 per requested return.
IRS will begin issuing refunds for the unemployment benefits break in May. Last month’s stimulus law provides that up to $10,200 of unemployment benefits received in 2020 are nontaxable for taxpayers with AGIs of less than $150,000. In general, individuals who filed their 2020 Form 1040 before the law was enacted needn’t amend it to claim the break. IRS will adjust their tax and send any refunds in late spring and summer. Some people may want to file an amended return if the exclusion makes them eligible for the earned income credit or other credits that they didn’t claim on their originally filed return. That’s because the Service can adjust credits claimed on the original return but can’t give filers new credits.
IRAs & Plans
Working individuals now have more time to make IRA contributions for 2020.
Your IRA payin is due by May 17. Be sure that you tell your IRA custodian to apply the payin to the 2020 year. For 2020, you can contribute up to the lesser of $6,000 … $7,000 if age 50 or older … or your taxable compensation for the year. The same dollar limits apply for contributions made for 2021. And remember, for 2020 and later, there is no age limit for making contributions to traditional IRAs or Roths.
Don’t roll over a 401(k) plan balance to an IRA and tap it before age 59½.
The withdrawal can be nailed with a 10% penalty, the Tax Court decides. A 55-year-old Home Depot employee retired from his job, took the money he had in his employer’s 401(k), and rolled it over to a traditional IRA. Two years later, he took out $37,000 from the IRA. Because he tapped the IRA before age 59½, he owes the 10% penalty. The exception to the penalty for early withdrawals made after leaving your job in the year you are age 55 or older is available only for payouts from company plans, not from IRAs (Catania, TC Memo. 2021-33).
The Labor Dept. is easing up on ESG investments in retirement accounts. Mutual funds that choose investments based on environmental, social responsibility or governance factors have become increasingly popular with investors over the years. In Nov. 2020, DOL under then-President Trump finalized rules that make it harder for fiduciaries of workplace retirement plans governed by federal pension law to use ESG factors in their investment decisions. The Biden administration is now taking another look at those regs. In the meantime, DOL has announced that it won’t enforce the 2020 regs or bring enforcement actions against fiduciaries.
Awaiting a paper stimulus check from IRS? You may get a prepaid debit card.
The Service is mailing out paper checks or debit cards to eligible individuals for whom it doesn’t have bank account data. Debit cards will arrive in a white envelope, and they’ll have “Visa” on the front and “MetaBank” imprinted on the back of the cards.
The cost of COVID-19 personal protective equipment is a medical expense, IRS says. Included are amounts paid for face masks, hand sanitizer and wipes. Itemizers can deduct medical expenses on Schedule A only to the extent total medicals exceed 7.5% of adjusted gross income. The PPE expenses are also able to be covered by health flexible spending arrangements and health savings accounts.
Not paying salary to its owner causes headaches for an S corporation. A lawyer was the president of her own S firm. The company didn’t pay her a salary but did provide her with funds, which the firm deducted as officer’s compensation on its Form 1120-S. She didn’t report the compensation as income on her 1040, and the firm failed to pay any employment taxes on its remittances to her.
The firm owes employment tax, and she owes income tax, the Tax Court says. The owner performed services and is an employee (Ward, TC Memo. 2021-32).
Shoddy recordkeeping costs a tax preparer a large chunk of money.
She can’t deduct her vehicle expenses, even though she used her personal car in her business. She claimed she drove 34,560 miles for business during the year, and she took the standard mileage allowance. But the mileage log that she kept had lots of holes, and the Tax Court didn’t find it reliable (Brown, TC Oral Order).
The filing date for owners of foreign accounts is April 15. U.S. taxpayers with overseas accounts whose total value exceeded $10,000 at any time in 2020 are required to electronically submit FinCen Form 114 (FBAR) to report them. Filers who miss the deadline get an automatic six-month extension to file the form.
Willfully failing to report foreign accounts can lead to a stiff penalty.
The standard for willfulness in this context includes reckless conduct, an appeals court says in upholding a $700,000 fine against a U.S. citizen who didn’t report Swiss financial accounts that she owned for many years.
The fine isn’t capped. Under the statute, the penalty is the greater of $100,000 or 50% of the highest balance in the accounts. Regulations promulgated in 1987, before the statute was amended to add the 50% language, state that the penalty is capped at $100,000. The court decided the statute controls (Kimble, Fed. Cir.).
The fine for a nonwillful reporting violation is much less, at $10,000.
And this penalty applies per FBAR form, not per account, two courts say.
In the first case, a U.S. citizen who owned 14 foreign accounts in the U.K. didn’t timely report them on the FBAR form for 2010. In 2012, she participated in IRS’s voluntary disclosure program and submitted the FBAR at that time. After determining the late reporting was nonwillful, IRS assessed a $140,000 penalty ($10,000 x 14 violations). An appeals court decided that the statute authorizes IRS to impose only one nonwillful penalty when an untimely FBAR is filed, no matter the number of accounts. The fine here is $10,000 (Boyd, 9th Cir.).
The second case involved a U.S. citizen who owned four foreign accounts that he didn’t disclose in 2006-09. IRS assessed a nonwillful penalty of $160,000 ($10,000 x 16 violations). The correct penalty is $40,000 (Giraldi, D.C., N.J.).
Donating the right to use your vacation home to a charitable auction?
You don’t get a tax write-off because you gave only a partial interest in it. And watch out for this tax trap if you also rent out the property to others: The time used by the winning bidder counts as personal use by you for purposes of the rule that prohibits the deduction of losses from rental real estate when the owner’s personal use tops the greater of 14 days or 10% of days rented.
Installing an accessibility ramp doesn’t invalidate a façade easement, IRS says privately. The owner of a historic building donated a façade easement on it to charity. He then put in a ramp required under the Americans With Disabilities Act. Per IRS lawyers, upkeep of a certified historic structure encumbered by an easement is permitted because upkeep is essential for preservation of the building … and installing an ADA-required accessibility ramp is akin to upkeep. Such a project doesn’t jeopardize the donor’s charitable contribution deduction.
Online communication between IRS and tax-exempt groups is in the works. IRS’s Tax-Exempt & Government Entities Division, which covers tax-exempt organizations, employee benefit plans, and state and local governments, is planning to launch a secure messaging system. Under the voluntary program, TEGE personnel and stakeholders could exchange electronic communications via a protected mailbox, thus cutting down on the bulk of paper correspondence.
IRS has a useful guide for exempt groups that conduct gaming activities. It describes how gambling could affect an organization’s tax-exempt status and in what circumstances profits from casino nights and other gaming-related events are taxed as unrelated business income. Bingo games are specifically addressed. Also covered are rules for reporting winnings, withholding obligations, recordkeeping, and excise and payroll tax issues. See IRS Publication 3079 for the details.
If your group filed a Form 1023 or 1023-EZ application for tax exemption …
Check IRS’s website for updates. IRS receives over 95,000 applications for tax-exempt status each year and has fallen woefully behind on processing them. Use “Where’s My Application for Tax-Exempt Status” to view the guidelines and dates on when you can expect to hear from IRS. The tool has a chart with the form number and latest postmark date of applications that have been assigned to specialists.
More IRS audits of large partnerships are coming, as the agency looks to beef up enforcement. In 2019, IRS audited only 0.2% of partnerships. A group of agents and specialists will focus on issues relating to large partnerships and their owners. IRS will use data analytics to select the returns for examination.
Is IRS up to the challenge of handling the revamped child credit for 2021?
That’s a question that tax professional groups and others are asking. We wrote in our last Letter about the changes to the child credit, including the fact that the latest stimulus law requires half of the credit to be paid in advance by having IRS send periodic payments to eligible families in the second half of this year. Democratic lawmakers want IRS to make monthly payments beginning in July, but the law gives IRS wiggle room to start payments later in 2021 and to make them less often than monthly, provided the agency pays families half the credit by Dec. 31.
Fully delivering periodic child credit payments will be a difficult task for IRS, not in the least part because of its out-of-date computer systems, shrunken workforce, tax changes, and its many other duties. The law requires IRS to develop an online tool for families to update changes to their family circumstances or adjusted gross income. IRS says it will have to build a system to compute and recompute payments as people provide new information. The system must also be able to issue and track payments, as well as reconcile the payments with the taxpayer’s credit taken on the tax return.
IRS might not have its online tool set up in time, the agency head warns. And sending out monthly payments will be a challenge, at least in the beginning.
Another issue is the potential for fraud with a fully refundable credit. IRS estimates that in 2019 it improperly paid $7.2 billion in refundable child credits.