Tax Law Test for Real Estate Professionals

Tax Law Test for Real Estate Professionals Generally, investors in activities such as real estate in which they don’t materially participate can only take deductions up to the amount of their passive income for the year. The IRS often scrutinizes large deductions for rental real estate losses claimed by so-called “real estate professionals.” In a new case involving a couple that wholly owned a partnership, Dunn, TC Memo 2022-112, 11/29/22, the Tax Court denied losses because neither spouse met the requisite tax law test. Generally, investors in activities such as real estate in which they don’t materially participate can only take deductions up to the amount of their passive income for the year. Thus, they can’t claim any annual passive activity loses (PALs), although there’s a limited PAL write-off for real estate investors qualifying as “active participants.” Normally, you can use up to $25,000 of loss to offset non-passive income if you are an active participant. But the $25,000 offset is phased out for a modified adjusted gross income (MAGI) between $100,000 and $150,000 of MAGI. Note: This phase-out provision is not indexed for inflation. However, if your real estate activities rise to the level of being a real estate professional, you can deduct a loss against non-passive income, just like any other business. There are two key requirements for qualifying as a real estate pro. 1. More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. 2. You must spend more than 750 hours on your real property trades or businesses. As long as you satisfy this two-part test, real estate activities in which you materially participate aren’t treated as passive activities. But the IRS sticks to the strict letter of the law. Facts of the new case: A married couple, residents of Georgia, formed a partnership to manage heir real estate properties. Each spouse had a full-time job during the tax years in question. The couple filed joint tax returns for 2013 and 2014. They reported losses of $85,260 and $48,740, respectively, relating to the real estate properties subject to the PAL rules. The couple produced logs purportedly show their collective rental real estate activities during that time. The logs show 767 hours worked in 2013 and 407 hours worked in 2014. However, the logs didn’t specify which spouse worked these hours. In addition, the Tax Court said that the hours recorded in the logs were inflated to include hours spent physically present at the properties. Does either spouse qualify under the test for real estate professionals? The Tax Court examined the facts. First, the couple contended that they both spent more than one-half of the personal services they performed in a trade or business in real property trades or business. But the Tax Court disagreed. The evidence didn’t support this conclusion. Second, the couple further argued that they met the 750-hour requirement. To meet this requirement, only one spouse needs to have reached the 750-hour mark. But the Court wasn’t convinced that either spouse satisfied this burden. Accordingly, the Tax Court ruled that the test for real estate professionals wasn’t met. Taxes Internal Revenue Service (IRS) Article Income Taxes real estate taxes

IRS Delays $600 reporting on 1099-K forms for 1 year

IRS delays Form 1099-K $600 reporting threshold December 23, 2022 RELATED December 21, 2022 2023 brings lots of new to the IRS while keeping one problem: backlogs December 15, 2022 The AICPA’s tax policy and advocacy work: 2022 highlights December 12, 2022 Final regs. issued on centralized partnership audit regime TOPICS Tax IRS Practice & Procedure The IRS on Friday announced a delay in the $600 reporting threshold for third-party settlement organizations, which had been in effect for the 2022 calendar year. As a result, the IRS says third-party settlement organizations will not have to report tax year 2022 transactions on a Form 1099-K, Payment Card and Third Party Network Transactions, to the IRS or the payee for the lower, $600 threshold amount that was enacted as part of the American Rescue Plan Act (ARPA) of 2021, P.L. 117-2. Until the changes enacted by ARPA, third-party settlement organizations were allowed a de minimis exception to filing Form 1099-K with respect to payees with 200 or fewer such transactions during the calendar year with an aggregate gross amount of $20,000 or less. ARPA amended this de minimis amount to $600, with no minimum number of transactions, effective for calendar years beginning after Dec. 31, 2021. Third-party settlement organizations generally include banks or other organizations that process credit card transactions on behalf of a merchant and make an interbank transfer of funds to the merchant from a customer. Form 1099-K must be furnished to the participating payees on or before Jan. 31 of the year following the calendar year for which the return was made and must be filed with the IRS on or before Feb. 28 (March 31 if filing electronically) of the year following the calendar year for which the return was made. The new $600 minimum has been subject to widespread criticism. Last week, the AICPA sent a letter to the chairs and ranking members of the Senate Finance and House Ways and Means Committees, expressing "deep concerns" about the implementation of the $600 reporting threshold. In that letter, sent by Jan Lewis, CPA, chair of the AICPA Tax Executive Committee, the AICPA warned that the lower threshold would "lead to significant confusion in the tax system in the next several months." The AICPA also was concerned that an IRS matching program for 2022 Forms 1099-K could "result in significant taxpayer misunderstanding, and also lead to a growth in the IRS correspondence and processing backlog." Therefore, in Notice 2023-10, the IRS announced that it will regard calendar year 2022 as a "transition period" for purposes of IRS enforcement and administration of the $600 de minimis exception for third-party settlement organizations and third-party network transactions as provided in the notice. This means that for returns for calendar years before 2023, a third-party settlement organization is not required to report payments in settlement of third-party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. The IRS says that for years after 2022, it will enforce the $600 de minimis reporting threshold. The AICPA, according to Ed Karl, CPA, CGMA, vice president–Tax Policy & Advocacy, continues to call on Congress to raise the $600 de minimis exception for reporting by instituting a cost-of-living adjustment (COLA) using 1954 as the base period for the COLA.\ Information gathered by Nevine, J.D.

2022 Capital Gains Rates

2022 Long-Term Capital Gains Tax Rates Tax filing status 0% rate 15% rate 20% rate Single Taxable income of up to $41,675 $41,676 to $459,750 Over $459,750 Married filing jointly Taxable income of up to $83,350 $83,351 to $517,200 Over $517,200 Married filing separately Taxable income of up to $41,675 $41,676 to $459,750 Over $459,750 Head of household Taxable income of up to $55,800 $55,801 to $488,500 Over $488,500

IRS Delays $600 1099-K reporting requirement

IRS delays Form 1099-K $600 reporting threshold By Alistair M. Nevius, J.D. December 23, 2022 RELATED December 21, 2022 2023 brings lots of new to the IRS while keeping one problem: backlogs December 15, 2022 The AICPA’s tax policy and advocacy work: 2022 highlights December 12, 2022 Final regs. issued on centralized partnership audit regime TOPICS Tax IRS Practice & Procedure The IRS on Friday announced a delay in the $600 reporting threshold for third-party settlement organizations, which had been in effect for the 2022 calendar year. As a result, the IRS says third-party settlement organizations will not have to report tax year 2022 transactions on a Form 1099-K, Payment Card and Third Party Network Transactions, to the IRS or the payee for the lower, $600 threshold amount that was enacted as part of the American Rescue Plan Act (ARPA) of 2021, P.L. 117-2. Until the changes enacted by ARPA, third-party settlement organizations were allowed a de minimis exception to filing Form 1099-K with respect to payees with 200 or fewer such transactions during the calendar year with an aggregate gross amount of $20,000 or less. ARPA amended this de minimis amount to $600, with no minimum number of transactions, effective for calendar years beginning after Dec. 31, 2021. Third-party settlement organizations generally include banks or other organizations that process credit card transactions on behalf of a merchant and make an interbank transfer of funds to the merchant from a customer. Form 1099-K must be furnished to the participating payees on or before Jan. 31 of the year following the calendar year for which the return was made and must be filed with the IRS on or before Feb. 28 (March 31 if filing electronically) of the year following the calendar year for which the return was made. The new $600 minimum has been subject to widespread criticism. Last week, the AICPA sent a letter to the chairs and ranking members of the Senate Finance and House Ways and Means Committees, expressing "deep concerns" about the implementation of the $600 reporting threshold. In that letter, sent by Jan Lewis, CPA, chair of the AICPA Tax Executive Committee, the AICPA warned that the lower threshold would "lead to significant confusion in the tax system in the next several months." The AICPA also was concerned that an IRS matching program for 2022 Forms 1099-K could "result in significant taxpayer misunderstanding, and also lead to a growth in the IRS correspondence and processing backlog." Therefore, in Notice 2023-10, the IRS announced that it will regard calendar year 2022 as a "transition period" for purposes of IRS enforcement and administration of the $600 de minimis exception for third-party settlement organizations and third-party network transactions as provided in the notice. This means that for returns for calendar years before 2023, a third-party settlement organization is not required to report payments in settlement of third-party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. The IRS says that for years after 2022, it will enforce the $600 de minimis reporting threshold. The AICPA, according to Ed Karl, CPA, CGMA, vice president–Tax Policy & Advocacy, continues to call on Congress to raise the $600 de minimis exception for reporting by instituting a cost-of-living adjustment (COLA) using 1954 as the base period for the COLA. In the letter to Congress, the AICPA also said it supports a recommendation by the National Taxpayers Union Foundation to raise the threshold to $5,000.

Republican House trying to Roll back IRS funding boost

87,000 new IRS employees at a cost of $80 billion, not if Representative McCarthy can remove this from the Climate and Health Care Package. McCarthy has said if he becomes Speaker he will push the reduction of this $80 billion piece of the Climate bill.

IRS still processing millions of returns

 IRS still coping with millions of unprocessed tax returns

By  Michael CohnNovember 10, 2022, 2:52 p.m. EST4 Min Read

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The Internal Revenue Service had 4.4 million unprocessed individual returns received this year as of Oct. 28, including tax year 2021 returns and late-filed returns from the prior year, as IRS funding has become more of an issue during election season.

The IRS reported in the latest update this week on the status of its mission-critical operations during COVID-19 that of those 4.4 million unprocessed returns, 1.9 million require error correction or other special handling, while 2.5 million are paper returns still waiting to be reviewed and processed. The work typically doesn't require the IRS to correspond with taxpayers, but does require special handling by an IRS employee so, in those cases, it's taking the IRS more than 21 days to issue any related tax refund.

Internal Revenue Service headquarters in Washington, D.C.

Samuel Corum/Bloomberg

Some of the problems holding up tax returns come from amended returns that arrived at the IRS and problems with tax returns indicating pandemic-related benefits such as expanded unemployment insurance and employee retention credits, for which the rules and thresholds changed, and that were exploited in some cases by criminals and fraudsters. The IRS is also still trying to hire thousands more employees to fill the ranks as workers retire.

Bonus depreciation, what is allowed?

 What can be depreciated using bonus depreciaiton?

According to the IRS, qualified property eligible for bonus depreciation includes:

• Tangible property depreciated under MACRS
• New tangible property (other than buildings or structural components)
• Used tangible property (other than buildings or structural components)
• Certain production property
• Qualified film, television, and live theatrical productions.
• Property that will last 20 years or less
• Computer software, as defined in and depreciated under section 167 (f) (1).

IRS penalty, try the First Time Abatement approach

 It can only apply to 1 year. Generally, the first year if you have multiple years with penalties. The idea behind the first-time penalty abatement procedure is that if you have a clean tax history for the past 3 years, you are granted a mistake without getting penalized.

Student Debt forgiveness up to $10,000

 As part of President Joe Biden’s historic student loan forgiveness plan, up to 8 million people could get automatic debt relief, according to the White House.

Across the board, most people with federal student debt will be eligible for some forgiveness: up to $10,000 if they didn’t receive a Pell Grant, which is a type of aid available to low-income undergraduate students, and up to $20,000 if they did. The aid is limited to those who make less than $125,000 per year, or married couples or heads of households earning less than $250,000.

Those who will get automatic loan cancellation are those for whom the U.S. Department of Education already has income data on file and can therefore verify eligibility without waiting for an application.

Who qualifies for the automatic loan cancellation?

To automatically verify certain borrowers’ income data for tax years 2021 or 2020 (whichever is lower), the Education Department plans to use data obtained through the Free Application for Federal Student Aid, or FAFSA, as well as via income-driven repayment plans.

The FAFSA is how families apply for financial aid for college each year, while income-driven repayment plans allow borrowers to repay their loans in a more affordable way by capping their monthly bills at a share of their earnings. Both require proof of income; however, because the government only cares about the earnings for 2020 or 2021, the timing here will matter.

1099-K reporting changes

 Advocates are pushing for Congress to restore the $20,000 threshold for reporting transactions from payment cards and third-party networks after it was lowered by the American Rescue Plan Act to just $600, warning of a tidal wave of Forms 1099-K hitting millions of unsuspecting taxpayers and an already overburdened Internal Revenue Service and overworked tax preparers.

They are hoping that lawmakers will suspend the change in the threshold during the lame duck session in Congress after the midterm elections as part of an end-of-year tax extenders package or at least find some middle ground in between. Last month, a group of over 70 mostly conservative and free market organizations, including the National Taxpayers Union, Americans for Tax Reform, the Center for a Free Economy and the American Business Defense Council, sent an open letter to congressional leaders emphasizing the urgency of the issue.

"Under the prior law, a 1099-K was issued only in the event that a business charged customers at least 200 times in a year, and $20,000 in the aggregate," they wrote. "H.R. 1319 eliminated the 200 transaction threshold entirely, and lowered the dollar hurdle to just $600. As a result, both very small business ventures and unwitting non-business taxpayers have found themselves caught in the 1099-K reporting net. Millions of Americans who have never received a 1099-K form before, and don't know what to do with it, will get one. If they seek help from the IRS, they will quickly run into an overwhelmed agency trying to process this gusher of new 1099-K returns, keep up with filing season, clear out prior backlogs, respond to correspondence, and even answer the 800-number telephone line."

Student Debt, Biden proposes the first $10,000 of student debt be foregive

 Interesting, President Biden has proposed that the 1st $10,000 of a student's debt be foregiven. and not counted as income for tax purposes.  Paying for this idea will be difficult.

Employee Retension Credits, do you quaify?

YOU QUALIFY IF:

A governmental authority ordered your business to shut down or reduce its hours.

• Your business fully or partially shut down during any quarter of 2020 or 2021 (starting March 12, 2020).
• The credit applies only to the portion of the quarter(s) you were affected by the shutdown.

OR

Your business experienced a significant reduction in gross receipts.

• For any quarter of 2020, your gross receipts were 50% or less than the same quarter in 2019

OR

• For any quarter of 2021, your gross receipts were 80% or less than the same quarter in 2020 OR 2019

Standard Mileage Rate increase

 The standard mileage rate has been risen to 62.5 cents for the remainder of the year.

58.5¢ to 62.5¢ per mile

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For the second half of 2022, the standard mileage rate for business use of an automobile will increase from 58.5¢ to 62.5¢ per mile. The rates for deductible medical travel and moving expenses for active-duty members of the military will rise from 18¢ to 22¢ per mile.

IRS generally correct with the recovery rebate credits

 The IRS correctly calculated taxpayers' eligibility for a recovery rebate credit in the 2021 filing season 99.3% of the time, the Treasury Inspector General for Tax Administration (TIGTA) reported Monday.

However, even the corresponding 0.7% error rate involved hundreds of millions of dollars in improper allowances of the credit, and TIGTA found other instances where individuals should have received a recovery rebate credit or a greater amount of one but didn't.

The report, Processing of Recovery Rebate Credit Claims During the 2021 Filing Season (No. 2022-46-032), dated May 19, analyzed reasons for the errors, which were both systemic and manual, and made 22 recommendations, 12 of which the IRS disagreed with. Some recommendations the Service agreed to were issued as alerts to the Service during TIGTA's study, some of which resulted in processing changes during the filing season.

Achieving a 99.3% accuracy rate was "no small feat," Kenneth Corbin, IRS commissioner, Wage and Investment Division said in the memo providing IRS management's response to the draft report. As TIGTA also noted, 26.3 million tax returns claimed recovery rebate credits for 2020 totaling $39.2 billion, as of May 27, 2021.

The recovery rebate credit, a provision of the Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136, provided the refundable credit of up to $1,200 per eligible adult and $500 per qualifying child, applied to the 2020 tax year. It was extended and modified by the Consolidated Appropriations Act, 2021, P.L. 116-260, including an additional recovery rebate credit for 2020 of up to $600 per eligible adult and $600 per eligible child.

Both portions of the recovery rebate credit were paid in advance to qualifying taxpayers as economic impact payments (EIPs) so that the recovery rebate credit was generally available only to taxpayers who did not receive either or both EIPs or their full eligible amounts but who had been eligible for them. The first round of EIPs was issued to nearly 162 million individuals and the second to 146.5 million individuals, for a combined total dollar amount of nearly $413 billion as of Feb. 4, 2021.

Although the recovery rebate credit error rate was low, TIGTA found that more than 355,000 individuals had received recovery rebate credits totaling $603 million for which they may have been ineligible either because they were listed as a dependent on another tax return or the amount was based erroneously on a dependent who had been claimed on another return or for whom an EIP had been paid. Some other ineligible claimants were nonresident aliens or residents of U.S. territories.

TIGTA determined that, on 181,743 returns, the IRS miscalculated the recovery rebate credit amount, including 117,314 returns for which the calculated recovery rebate credits were $218.7 million more than the taxpayers were entitled to, and another 64,429 returns where the recovery rebate credit was a total of $80 million less than the taxpayers should have received. The majority of these errors, 167,130, were made by tax examiners attempting to correct a discrepancy in the claimed versus eligible amount of the recovery rebate credit. Another 11,797 returns reflected an IRS programming error in calculating a recovery rebate credit for taxpayers claiming under the married filing separately status.

More than 11.2 million returns required resolution of an EIP/recovery rebate credit discrepancy, 5.6 million of them manually, TIGTA reported. Besides risking additional errors, manual corrections created lengthy delays, TIGTA said. More than 500,000 such returns were still being processed as of Sept. 2, 2021.

Fraud filters generally worked as intended, TIGTA reported, although a programming error prevented 7,478 returns with potentially erroneous recovery rebate credits totaling $29.4 million from being flagged for additional review before the recovery rebate credits were paid.

Where the IRS disagreed with TIGTA's recommendations, the Service generally cited the relatively few numbers of taxpayers involved and other priorities competing for its limited resources. Although TIGTA recommended that the IRS review returns that claimed both an EIP and a recovery rebate credit for the same qualifying child or a recovery rebate credit for an individual claimed as a dependent on another return, the IRS replied that returns are subject to selection for examination.

With respect to approximately 10 million taxpayers who appeared to have been eligible to claim a recovery rebate credit but did not do so, the IRS declined to take the initiative to issue them one unilaterally, noting that "taxpayers are not required to claim the [recovery rebate credit]" and that the IRS had "widely communicated the need to file the Tax Year 2020 tax return to claim the credit based on current household circumstances."

TIGTA faulted this response for being inconsistent with the IRS's automatic adjustments with respect to the exclusion from gross income of up to $10,200 in unemployment benefits under the American Rescue Plan Act, P.L. 117-2, adding that "it is unrealistic for IRS management to assume that prior IRS communications are sufficient to ensure that all individuals, including those who do not normally file a tax return, understand whether they are eligible for the [recovery rebate credit] and how to claim it."

Donations limited to 60% of your AGI.

 

Limitations on annual church donations

The total of your church cash donations plus all other charitable contributions you make during the year typically cannot exceed 60 percent of your adjusted gross income (AGI). If it does, then you cannot deduct 100 percent of your donations in the current tax year. However, the amounts you can't deduct this year can be used as a deduction on one of your next five tax returns.

Tax treatment when flipping a house not sold at year end

 Good client of mine is flipping a house and it is still being worked on at year end.  Tax treatment is to put the unsold house in inventory and NOT to depreciate any of the house.

Either way, if you flip houses that is ordinary income. The flips are inventory and tax is owed on the gain as they are sold. Flips are NOT held as rentals so you don't get any benefits of depreciation.

Advance Child Tax Credit 2021

 The IRS will send out letters showing the details of the Tax Credit eligible individuals received in 2021.

IRS to accept 2021 tax returns

 Irs to accept 2021 tax returns starting on 1/24/2022

100% Meal Deduction for 2021-2022

 

New Meal Deduction Rules

As a refresher, starting on January 1, 2021, through December 31, 2022, a business may claim 100% of food or beverage expenses paid to restaurants assuming the business owner (or employee) is present when provided and the expense is not lavish or extravagant under the circumstances. For all other entertainment and business meal expenses, the 50% meal deduction would still apply.

IRS Guidance Highlights

The guidance provides additional information on when the higher deduction amount can be claimed.

• Restaurant Definition – The guidance clarifies the term “restaurant” to mean any business that prepares and sells food or beverages for immediate consumption, regardless of whether those items are consumed on-site. Therefore, any qualifying purchases made at such establishments qualify for the 100% deduction. However, purchases made at any business which sells pre-packaged food or beverages such as grocery stores, specialty food stores, beer, wine or liquor stores, convenience stores, or vending machines do not qualify.
• On-Site Eating Facilities – The guidance also clarifies any eating facility located on the business premises for the purpose of furnishing employee meals (excluded from employee gross income), or an employer operated eating facility, even if operated by a third party under contract with the employer, is NOT a qualifying restaurant for purposes of the expanded meal deduction.

Good client called me about Florida Inheritance taxes

 Client received an inheritance recently and wanted to know how much was taxable.  Short answer is you don’t have to pay inheritance taxes on an inheritance in Florida. An inheritance tax is a tax levied against the property someone receives as an inheritance. A very small number of states have inheritance taxes, and again, Florida is not one of them.

Yes, tax dividends are taxed!

 Great client asked me if stock received instead of cash as a dividend was taxable when stock dividend was received.

Yes Virginia (Santa reference), tax dividends are taxed when received.  The confusion was whether the stock would only be taxed when sold.  This is what happens when you buy stock, however, this stock dividend is a payment, just not in cash.  You should receive a 1099-Div from the company to who issued the stock dividend for your tax return, probably in January.

UBER Accounting

 

Uber Driver Takes a Wrong Tax Turn

Whether clients run a business formally or informally, the IRS requires they keep adequate records for income and expenses, otherwise a visit to the Tax Court may be in their future to sort things out!

In a new case, Nurumbi, 2021-79, TC Memo 2021-79. 6/30/21, an Uber driver ran afoul of the rules, but at least was able to salvage some deductions in Tax Court.

Participants in the so-called “gig economy” ranging from drivers to temporary landlords to delivery services people are generally treated as self-employed individuals. In this capacity, the income they receive is fully taxable, but they may be entitled to deduct qualified business expenses to offset part of the tax. In addition, the participant is liable for self-employment tax, but can write off half of the tax on their personal return.

Facts of the new case: The taxpayer, a resident of Arizona, used his Uber account and mobile application to provide transportation to passengers in exchange for fares.  But he wasn’t the only driver using the account during the tax year at issue.

Notably, the taxpayer recruited friends and family to sign up for Uber under his account. They rented his vehicles, which he had purchased using car title loans or at auctions.

The drivers could access the Uber app to see their trips driven and fares collected, but all fare proceeds (net of Uber’s fee) were paid directly to the taxpayer’s Uber account. There were no written contracts between the taxpayer and the other drivers.

Every week Uber paid the taxpayer for his own driving activity and for that of the drivers under his account. It would subtract its fee and deposit the remaining funds into a Bank of America (BoA) account. Then the taxpayer would withdraw funds from the BoA account, deposit some of the withdrawn funds into a Banco Bilbao Vizcaya Argentaria (BBVA) account and retain the remainder as cash.

The taxpayer paid the drivers their individual earnings, as shown on the Uber weekly statements, routinely withholding $250 as a vehicle rental charge and occasionally reimbursing the drivers for gas, vehicle maintenance and other miscellaneous expenses. Some of these payments were made by electronic transfer from the BBVA account and others were made in cash.

Key points: The taxpayer didn’t provide the drivers with any documentation indicating their payment and the drivers did not submit receipts for gas, vehicle maintenance or other miscellaneous expenses. Similarly, the drivers did not keep any logs of expenses incurred while driving under the taxpayer’s Uber account. Nor did the taxpayer keep a log or other document recording how much he paid the drivers, whether by BBVA transfer or in cash.

The taxpayer’s situation unraveled when Uber issued him a 1099-K that reported more than $542,000 in payments that he left off his return. The IRS adjusted his 1040 to include the unreported income and allowed a deduction for the bank transfers to the other drivers, but not for the cash payments.

End of the line: The lack of documentation proved to be fatal to the taxpayer’s case. The burden of proof is on the taxpayer to establish the full amount he claimed to have paid out, including the cash. Although the Tax Court found the taxpayer’s testimony to be credible, it upheld the adjustments made by the IRS.

There’s a moral to this story: Encourage clients to keep detailed records of their business transactions. The IRS and the courts aren’t likely to simply accept their word if income or deductions are ever challenged. This is especially true for participants in the gig economy who often play fast and loose with the rules.

Thanks to Ken Berry for this insightful information for Uber drivers

Retirement accounts and their tax consequences

 Pretax Retirement Accounts

Some of the most common pretax retirement accounts are the 401(k), traditional IRA, 403(b) and 457 plans. Retirement savers were generally given a tax deduction when they made contributions to these plans and will owe taxes when they eventually make withdrawals from these pretax retirement accounts.     

 At some point, you will be forced to begin making withdrawals. These are called required minimum distributions (RMDs), which now kick in at age 72. People who are still working at age 72 (or older) can potentially delay taking RMDs from their 401(k)s until they retire. RMDs will still be required at age 72 for traditional IRAs, regardless of if you have retired or not.

Post Tax Retirement Accounts:  Roth IRAs

You can take tax-free retirement income from both a Roth IRA and a Roth 401(k). Unlike a traditional IRA, you won't get a tax deduction when you contribute to a Roth account, but your growth and withdrawal are tax-free in retirement.

For withdrawals to qualify as tax-free retirement income, you must meet two criteria. First, you must have held your Roth account for at least five years before you can take tax-free withdrawals. And although you can withdraw your contributions at any time tax-free, you generally must be at least age 59½ to be able to withdraw the growth of the account without facing a 10% early withdrawal penalty.

Social Security Retirement Income

There was a time when all Social Security income was tax-free. However, that came to an end ironically at the hands of Ronald Reagan, who is generally thought of as someone who wanted to slash taxes. The good news is that not all your Social Security benefits will be taxed in retirement.

If your provisional income is less than $25,000 ($32,000 for married couples filing a joint return), your Social Security benefits are still tax-free. If your provisional income is between $25,000 and $34,000 ($32,000 and $44,000 for joint filers), then up to 50% of your benefits are taxable. If your provisional income is more than $34,000 ($44,000 for joint filers), then up to 85% of your benefits are taxable.

While I am a huge fan of generating tax-free income in retirement, I hope everyone reading this will have an income large enough that at least some of your Social Security benefit gets taxed.

Pensions Income

Pensions are typically funded with pretax money like your 401(k) or IRA. That means your pension income in retirement will be taxable.

Business owners and the self-employed coming up on retirement may be able to make substantial contributions to a Cash Balance Pension Plan. Depending on your age and income, you may be able to contribute around $300,000 or so, pretax, into your own pension. (This number can be even larger if you have family members working with you in the business). This can be a huge tax planning opportunity and a great way to catch up when it comes to increasing your retirement income.

Stocks, Bonds, ETFs, and Mutual Funds

Assuming you own stocks, bonds, ETFs, or mutual funds outside of your specific retirement accounts (like an IRA or 401(k)), your gains will be taxed when they are realized. If you sell your investment after you've held it for more than a year, the proceeds are taxed at long-term capital gains rates of 0%, 15% or 20%. This can be a huge tax saving when compared to the top 37% tax bracket on ordinary income.

Higher earners may also get hit with the Obamacare surtax. This is a 3.8% surtax on net investment income (NII) on top of the capital gains rate for single taxpayers with modified adjusted gross incomes of more than $200,000 and $250,000 for joint filers. This extra 3.8% tax is due on the smaller NII or the excess of modified AGI over the $200,000 or $250,000 amounts. NII includes income from dividends, taxable interest, capital gains, passive rents, annuities, royalties, etc.

When you sell an investment that you have held for a year or less, the gains are short-term and are taxed at your ordinary income tax rates.

Annuity Income

For those with a non-qualified annuity, when you take retirement income payments from an annuity, there is a good chance that most of the income you receive will be taxable. The portion of the payment that represents your principal (the money you contributed) is tax-free; the rest is taxable. When taking income from an annuity, you take out your account's growth first, which is taxable.  

If you just happen to own an annuity in a 401(k), IRA, Roth IRA and so on, the taxation rules listed above would apply.

Dividend Income

Not all dividend income is created equally. Income paid in the form of dividends by companies to their stockholders is treated for tax purposes as qualified (most common) or non-qualified. Qualified dividends are taxed at long-term capital gains rates. Non-qualified dividends are taxed at ordinary income tax rates.

Municipal Bond Taxation

Municipal bond interest is exempt from federal taxation. Similarly, interest from government bonds issued in your home state is typically exempt from state income taxes. However, when buying and selling municipal bonds, you will still be subject to federal capital gains taxation.

Interest on a Bank Account

Fortunately, or unfortunately, depending on how you look at it, this isn't much of an issue for most people. That is because of today's minuscule interest rates. But it is still good to know that ordinary income tax rates apply to interest on banks' interest, including savings accounts, certificates of deposits, and even money market accounts. Most banks will only issue a 1099 tax form if you earn at least $10 in interest during a calendar year across your accounts with them.

Cash-Value Life Insurance

For those with cash-value life insurance, which I often call the Rich Person Roth, you can potentially get a lifetime of tax-free income. Assuming you follow the IRS rules, you should be able to avoid taxation on gains within your cash life insurance policy. Talk with your trusted financial planner to make sure you understand the rules and guidelines to maximize the value of your policy and the tax-free income it can generate.

You've worked hard building up your retirement nest egg. Make sure to put some effort (or seek expert tax planning guidance) into planning your retirement income streams. Why pay more taxes in retirement than needed? Smart tax planning and retirement income strategies can help you reduce your taxes in retirement and thereby increase your net retirement income.

Thanks to David Rae at Forbes for pulling this valuable information together!

SBA Quadruples Covid 19 EIDL limits

SBA quadruples COVID-19 EIDL limit to $2 million 

The U.S. Small Business Administration (SBA) announced major modifications to the COVID-19 Economic Injury Disaster Loans (EIDL) program, including raising the loan cap from $500,000 to $2 million and adding business debt payments to the list of ways businesses can use the loan proceeds. 

  In a news release issued late Thursday afternoon, the SBA said it was implementing the changes to make it easier for the small business communities still reeling from the pandemic, especially hard-hit sectors such as restaurants, gyms, and hotels, to access the more than $150 billion in funding available for loans.

The following key changes were announced. 

1) All are effective immediately: 

2) Increasing the COVID-19 EIDL cap from $500,000 to $2 million: 

3) Loan proceeds can be used for any normal operating expenses and working capital, including meeting payroll, purchasing equipment, and paying debt. 

4) COVID-19 EIDL funds are now also eligible to prepay commercial debt and make payments on federal business debt. 

5)  Implementation of a deferred payment period: 

6) The SBA said small business owners will not have to begin COVID-19 EIDL repayments until two years after loan origination. 

7) Payments are deferred for the first two years (during which interest will accrue), and payments of principal and interest are made over the remaining 28 years.  The agency previously had implemented an 18-month deferment period for loans made during 2021. Establishment of a 30-day exclusivity window: 

8) To ensure Main Street businesses have additional time to access these funds, the SBA said it is implementing a 30-day exclusivity window of approving and disbursing funds for loans of $500,000 or less. Approval and disbursement of loans over $500,000 will begin after the 30-day period. 

Simplification of affiliation requirements: To ease the COVID-19 EIDL application process for small businesses, the SBA established more simplified affiliation requirements to mimic those of the $28.6 billion Restaurant Revitalization Fund. 

The COVID-19 EIDL program, which runs through Dec. 31, offers 30-year loans with fixed interest rates of 3.75% for small businesses, including sole proprietors and independent contractors, and 2.75% for not-for-profits. The SBA referenced the RRF in an interim final rule (IFR) published Wednesday that provides details on many of the changes to the COVID-19 EIDL program. The IFR notes that while the RRF was appropriated $28.6 billion to provide as grants to the restaurant industry, the program received 278,304 applications seeking more than $72 billion in assistance, nearly three times the amount appropriated. Funding was quickly exhausted, leaving 177,300 businesses without assistance — evidence, the SBA said, of unmet funding needs by businesses in an economy now dealing with an upswing in COVID-19 infections related to the Delta variant of the virus. The IFR also expands COVID-19 EIDL eligibility from organizations with no more than 500 employees to businesses in the hardest-hit industries that have 500 or fewer employees per physical location, provided the business, together with its affiliates, has no more than 20 locations. The new rule allows COVID-19 EIDL recipients to use loan proceeds to make debt payments including monthly installments, deferred interest, and pre-payment on business debt. The same payments, except for pre-payments, are now permitted on loans from federal agencies (including the SBA) and licensed Small Business Investment Companies (SBICs).

Infrastructure Deal's Tax Effect

 Infrastructure bill would end ERC, increase cryptoasset reporting

The infrastructure bill approved by the Senate on Tuesday (H.R. 3684) would terminate the employee retention credit early and would require broker reporting of cryptoasset transfers. It also contains a few other tax provisions along with spending on a wide variety of infrastructure and other projects.

H.R. 3684, known as the Infrastructure Investment and Jobs Act, passed the Senate by a vote of 69–30 and now goes to the House of Representatives for consideration.

While there are relatively few tax provisions in the infrastructure bill, the Senate Budget Committee released a memorandum on Aug. 9 that outlines more extensive tax changes the members would like to see in a fiscal year 2022 budget reconciliation bill. Those listed in the memo include extensions of the child tax credit, earned income tax credit, and child and dependent care credit; relief from the $10,000 state and local tax deduction cap; corporate and international tax changes; higher taxes for high-income individuals; and a carbon polluter import fee.

Employee retention credit

The infrastructure bill would end the employee retention credit (ERC) early, making wages paid after Sept. 30, 2021, ineligible for the credit (except for wages paid by an eligible recovery startup business).

The ERC was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and amended by the Consolidated Appropriations Act, 2021, P.L. 116-260. The American Rescue Plan Act, P.L. 117-2, enacted March 11, made the ERC available to eligible employers for wages paid during the third and fourth quarters of 2021; however, H.R. 3684 would repeal that extension. The IRS issued guidance last week on claiming the credit in the third and fourth quarters of 2021 (Notice 2021-49), but noted in that guidance that it is watching this legislative development.

Cryptoasset reporting

Section 80603 of the bill imposes new cryptoasset information reporting requirements on brokers. The Sec. 6045(c)(1) definition of “broker” is expanded to include anyone who for consideration effectuates “transfers of digital assets on behalf of another person.” For these purposes, “digital asset” is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology.”

The bill would amend Sec. 6045A to require brokers to provide information returns reporting any transfers of digital assets to accounts that are not maintained by a broker.

Disaster relief

The bill would modify the automatic extension of certain deadlines for taxpayers affected by federally declared disasters in Sec. 7508A, which was enacted in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, P.L. 116-94. The definition of a disaster area in Sec. 7508A(d)(3) would be amended to mean “an area in which a major disaster for which the President provides financial assistance under section 408 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5174) occurs.” Currently, that paragraph cross-refers to the definition in Sec. 165(i)(5)(B).

Other tax provisions

The bill includes other tax provisions, including extension of various highway-related taxes, and extension and modification of certain superfund excise taxes. It also would allow private activity bonds for qualified broadband projects and carbon dioxide capture facilities.  

— Thanks to Alistair M. Nevius, J.D., for this information 

American Rescue Plan outlined

 The American Rescue Plan Act included changes to the child tax credit that were designed to benefit certain taxpayers; however, some of these changes are now causing confusion and anxiety for many. 

The American Rescue Plan Act included changes to the child tax credit that were designed to benefit certain taxpayers; however, some of these changes are now causing confusion and anxiety for many. The American Institute of CPAs (AICPA) recognizes the stress many taxpayers and tax professionals are experiencing and is providing useful information and tips to help ease the burden, reduce the complexity and clarify details.

What Are the Big Changes Taxpayers Need to Be Aware Of?

Among the many changes to the child tax credit, AICPA recommends that taxpayers be aware of the following:

• The age of qualifying children was raised from 16 to 17.
• The tax credit amount has increased for certain taxpayers.
• It is fully refundable (meaning you can receive it even if you don’t owe the IRS).
• Up to half of the credit may be received in monthly payments unless taxpayers opt out.
• The IRS will pay half the credit in the form of advance monthly payments beginning July 15, 2021 as a prepayment of the refund taxpayers would normally receive when they file their 2021 income tax returns. Taxpayers will then claim the other half when they file their 2021 return.

How Might the Tax Credit Impact 2021 Tax Returns?

Taxpayers should also understand that these changes are temporary and only apply to the 2021 tax year, and the decision to have the child tax credit payments received in advance will affect a taxpayer’s refund or amount due when that return is filed.

This means for those who choose to receive advance monthly payments now, they will either receive a lower refund next year or potentially owe tax (and maybe interest and penalties) that they wouldn’t ordinarily owe. To avoid any surprises, it’s important for taxpayers to contact a CPA to discuss their situation and make any necessary plans.

Should Taxpayers Opt Out of Receiving the Tax Credit?

Many taxpayers remain confused about whether they should opt out of receiving advance monthly payments. Here are some of the instances where taxpayers may want to opt out:

• If a taxpayer expects to owe taxes when they file their return next year, they might not want the advance payments now (as it would add to the amount they owe later).
• If a taxpayer is paying estimated taxes (e.g., the taxpayer is self-employed), they likely do not want to receive advance child tax credit payments. This is because the estimated tax the taxpayer is paying the IRS and the advance child tax credit payments that the IRS is giving the taxpayer are essentially netting each other out and can result in more tax (and potentially interest and penalties) owed when the taxpayer files their return.
• If taxpayers are divorced or separated and alternate claiming dependents.
• If a taxpayer’s income has increased from the prior years.

“Deciding whether or not to opt out of the child tax credit is a personal and individual decision that each qualifying taxpayer needs to make,” said AICPA Director for Tax Practice & Ethics, Cari Weston, CPA, CGMA. “Accepting the credit now can be a lifeline for many, but it’s important that taxpayers know how this will affect them during next year’s tax filing season as well. The AICPA is providing resources to our members to allow them to help their clients navigate the consequences and challenges they face.”

What Resources Are Available?

AICPA’s 360 Degrees of Financial Literacy program provides Americans with free resources to help them better understand their finances and make more informed money decisions. The website features articles, videos and financial calculators as well as information about working with a CPA, filing taxes and the importance of year-round financial planning.

Taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children, using the IRS’s child tax credit and update portal. Parents may also use the online portal to elect out of the advance payments or check on the status of payments. Note that certain functions of the IRS online portal are not currently available but are coming soon.

The IRS also has a non-filer portal to use for certain situations. Non-filers are those individuals who do not need to file a tax return but would have received a stimulus payment, such as individuals out of work, receiving Social Security or who are homeless.

Thanks to the AICPA for this information