Author Archives: support31

Tax Saving Tips March 2020

At the end of this letter is a reprint of the Committee on Finance Report, Stimulus Package Outline, Chairman Chuck Grassley

Use Your Business to Maximize Charitable Donations
Giving to your church, school, or other 501(c)(3) charity is a noble act no matter how you choose to give.

But for the purposes of tax savings, some forms of giving are much more beneficial to you than are others. As a business owner, you can use some business strategies to get the money to these institutions as business expenses.

While this does not change anything from the institution’s perspective, it hugely increases your tax savings. The Tax Cuts and Jobs Act (TCJA) makes it harder to benefit from your personal donations.

Let’s say you donate $10,000 to a church, school, or other 501(c)(3) charity:

Will you get a tax deduction—in other words, will you itemize?
Will you benefit from the entire $10,000 as an itemized deduction? In other words, did the $10,000 simply put you over the hump that beat the standard deduction?
Say you can deduct all $10,000 as an itemized deduction. Would making it a business deduction increase the tax benefit value to you?

The TCJA made two big changes that make it less likely that you will itemize. First, the TCJA set a $10,000 limit on your state and local income and property tax deductions. Second, it increased the 2020 standard deductions (adjusted for inflation) to

$12,400 for individuals, and
$24,800 for married couples filing jointly.

Even if you make a big donation, think about the problem this creates—suppose you are married and donate $17,000 to charity. If this is your only itemized deduction, your donation does you no good because it’s less than $24,800. Fortunately, there’s a much more tax-savvy way to give.

As a business owner, you can make a few modifications and convert your church, school, and other 501(c)(3) donations to a different type of deduction—an ordinary business expense—which increases the tax savings that land in your pocket year after year.

To turn a charitable donation into a business expense, the donation has to be involved in some way in promoting your business. In one way or another, you need to prove that your strategy has as its purpose attracting customers and revenue for your business.

The tax law rule is that your donation must

have a direct relationship to your business, and
create a reasonable expectation for a commensurate economic return.

Here are four examples of successful business practices that benefit charities and create business deductions:

In the Marcell case, the owner of a trucking company contributed cash to a hospital because he wanted to impress the chairman of the charity drive, who was a potential customer. The court found that Philip Marcell had a reasonable expectation for a commensurate return on his donation and treated the contribution as a business expense.
ABC Company attaches rebate slips to some of its products that it sells to customers. The customers can then present the rebate slips to the charity, at which point ABC Company pays the charity the amount listed on the slip.
In Revenue Ruling 72-314, the IRS ruled that the stockbroker corporation that paid 6 percent of its brokerage commissions to the neighborhood charity could deduct the payments as business expenses because there was a reasonable expectation that the arrangement with the charity would direct new business to the brokerage and help retain existing business.
Sarah Marquis, a sole-proprietor travel agent, made payments to charities on the basis of business they did with her. She had 30 charities as clients, and those 30 charities accounted for 57 percent of her business.

Eight Things to Know About the SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the landscape for retirement and savings planning.

Here are eight important reminders about this new law:

You can’t use contributions made in 2020 but applied to 2019 for any SECURE Act provisions that apply to contributions made after December 31, 2019.
If you inherit an IRA, you now have to empty it within 10 years. But there are many exceptions to this rule, including one for the surviving spouse.
You determine whether your inherited IRA qualifies for the old stretch IRA rules on the date of death of the original owner.
The “qualified birth and adoption” distribution exception to the 10 percent penalty is $5,000 per child per parent, based on our reading of the law.
Your inherited IRA distributions don’t count toward your RMDs for your other retirement accounts.
Minors who inherit an IRA get the old stretch rules, but once they reach the age of majority, they have 10 years from that date to deplete the account.
The new $10,000 Section 529 allowable distribution for payments of principal and interest on student loans is a lifetime limit on the beneficiary, but you (the account holder) can apply excess distributions to the beneficiary’s sibling, and those distributions count toward the sibling’s $10,000 lifetime limit.
The ability to retroactively create a stock bonus, pension, profit-sharing, or annuity plan does not allow plan participants to make retroactive elective deferrals. The retroactively created plan allows business contributions only. Remember, the retroactive ability applies in 2021. You hurt your plan participants by waiting. Don’t wait. Put your 2020 plan in place now.

Avoid the Gift Tax—Use the Tuition and Medical Strategy
If you or a well-off relative are facing the gift and estate tax, here’s a planning opportunity often overlooked: pay tuition and medical expenses for loved ones. Such payments, structured correctly, do not represent gifts.

The monies spent by you on the qualified medical and tuition payments reduce your net worth and taxable estate, but they do no harm to your income, gift, or estate taxes. Further, the loved one who benefits from your help does not incur any tax issues.

As unusual as this sounds, with the tuition and medical payments, you operate in a tax-free zone.

Gift and Estate Tax Exclusion

If you die in 2020, your heirs won’t pay any estate or gift taxes if your estate and taxable gifts total less than $11.58 million.

If you are married and have done some planning, you and your spouse can avoid estate and gift taxes on up to $23.16 million.

Lawmakers set the current rates with the TCJA and also set them to drop by 50 percent in 2026. Gifts made now continue as excludable should they exceed the upcoming 50 percent drop.

Beating the Gift Tax with Tuition

The tuition exception to the normal gift tax rules involves direct payment of tuition (money for enrollment) made to an educational organization on behalf of another individual.

You may not two-step this. For example, you can’t write a check to granddaughter Amy for $50,000 that she in turn uses for her tuition. Here, you made a $50,000 gift.

But if you write the $50,000 check directly to the educational organization to pay for Amy’s tuition, you are in the tax-free zone. The $50,000 does not bite into your gift and estate tax exemptions, because it’s for tuition.

The unlimited benefit here applies only to tuition for full-time and part-time students. You can’t use it for items such as dorm fees and books. You can’t pay the money to a trust and then require the trust to pay a grandchild’s future tuition costs (this fails the test for direct payment to the institution).

Qualifying Educational Organization

Tax code Section 170(b)(1)(A)(ii) defines “educational organization” as “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.”

The regs elaborate by explaining that the term “educational institution” includes primary, secondary, preparatory, or high schools, and colleges and universities.

Example. You have four children, ages 7, 8, 9, and 10, at a private school where the tuition is $17,000 per year per student. Grandma Grace pays directly to the school the tuition for each of the children. Grandma Grace has no gift tax or other tax issues. Her payments are in the tax-free zone.

You can also pay the tuition to a foreign university. That tuition payment is in the tax-free zone just as if you had paid it to the University of Chicago.

Irrevocable prepaid tuition meets the rules and offers planning opportunities. Grampa Zeke has four grandchildren, all in the first and second grades of private schools. He sets up and funds an irrevocable plan with each of the private schools to pay the tuition at their respective schools. The plans qualify for tax-free zone treatment.

Planning note. Prepaid tuition can be a great death-bed strategy.

Beating the Gift Tax with Medical

The tax-free zone treatment of medical expenses requires that you pay the money directly to the medical care provider or insurance company (when paying for health insurance).

Under this plan, you avoid gift taxes when you pay directly to the provider any medical expense that would qualify as an itemized deduction on your Form 1040. Here are the basics:

Qualifying medical expenses are limited to those expenses defined in Section 213(d) and include expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care. (See IRS Pub. 502, Medical and Dental Expenses for an easy-to-understand list of itemized medical deductions—note this link produces a PDF of the publication.)
In addition, the unlimited exclusion from the gift tax includes amounts paid directly to the insurance company for medical insurance on behalf of any individual.
The unlimited exclusion from the gift tax does not apply to amounts paid for medical care that are reimbursed by the donee’s insurance. Thus, if payment for a medical expense is reimbursed by the donee’s insurance company, the donor’s payment for that expense, to the extent of the reimbursed amount, is not eligible for the unlimited exclusion from the gift tax, and the gift is treated as having been made on the date the reimbursement is received by the donee.

Example. Sam, your buddy, takes a big fall while climbing Mount Everest. You pay $67,000 of his medical bills directly to the medical providers. You are in the tax-free zone and face no gift tax.

Say that the insurance company reimburses Sam for $31,000 of the medical bills that you paid, and Sam keeps the money. Now, you have the following tax situation:

You have $36,000 of medical bills that you paid directly to the provider that are in the tax-free zone and not subject to gift taxes ($67,000 – $31,000).
You can avoid $15,000 of gift taxes because of the 2020 annual exclusion. Thus, of the $31,000 reimbursed to Sam by the insurance company, you pay gift taxes on $16,000 and avoid taxes on the remaining $15,000 because of the annual exclusion.

Final Thoughts

The primary rule to remember when using the tuition and medical gift tax-free strategy is that you must make the payments directly to the institutions and providers. Imbed this rule in your brain as rule one for this strategy. Don’t violate it.

If you have a loved one who needs tuition or medical help from you, use the tax-free zone method. For example, you have an estate tax problem and Uncle Jimmy needs help with his medical bills. Don’t make a monetary gift to Jimmy to help him. Instead, make your checks payable to the medical providers who are billing Uncle Jimmy.

Even if you don’t have a gift tax problem today, use the tax-free method because, who knows, you could win the lottery tomorrow.

And don’t forget this strategy. Sure, you have an $11.58 million estate and gift tax exemption this year. In 2026, that’s scheduled to drop by 50 percent (adjusted for inflation). But the current deficit issues could trigger a drop to, say, the 2008 exemption amount of $2 million, or lower.

Beat the Unfair $10,000 SALT Cap with a C Corporation
C corporations cause double taxation for business owners, so you probably think you want to avoid them at all costs.

And for many of you, this is true, as the S corporation often provides the lower overall tax outcome.

But for some of you, the C corporation could provide the best tax outcome because it bypasses the $10,000 state and local tax (SALT) deduction cap, which was introduced by the Tax Cuts and Jobs Act (TCJA).

Prior to the TCJA, you could deduct as itemized deductions on your Form 1040, Schedule A—without limit—the following foreign, state, and local taxes:

Income taxes
Real property taxes
Personal property taxes
Foreign income and real property taxes

Tax reform took two direct actions against your Form 1040 itemized deductions for foreign, state, and local taxes. Beginning in tax year 2018,

you can’t deduct foreign real property taxes, and
your combined state and local income, real property, and personal property tax deductions may not exceed $10,000 ($5,000 on a married filing separate return).

If you operate your business as an S corporation, the S corporation passes its net income to your individual tax return. This causes you, the individual, to pay state income taxes on the S corporation income. Those state income taxes are subject to the $10,000 cap.

C Corporation Loophole

But there is an exception: This $10,000 limit applies only to individuals—meaning, taxes deducted on your Form 1040, Schedule A. The limit does not apply to C corporations.

If you operate your business as a C corporation, then your C corporation pays state income taxes on its net income and deducts those taxes on its corporate income tax return.

Husband-Wife Partnerships: The Tax Angles
When both members of a married couple participate in an unincorporated business venture, must it be treated as a husband-wife partnership for federal tax purposes? Answer: maybe, or maybe not. Figuring out the answer is important because it can have a huge impact on the couple’s self-employment tax situation.

Husband-wife partnerships must also file annual federal returns on Form 1065 along with the related Schedules K-1. As you know, partnership returns can be a pain. For these reasons, you generally want to avoid husband-wife partnership status when possible.

Example: Self-employment Tax Hit on Profitable Husband-Wife Partnership

Your husband-wife partnership will produce $250,000 of net self-employment income in 2020 (after applying the 0.9235 factor that reduces net income to taxable self-employment income on Schedule SE).

Assume the $250,000 is properly split 50/50 between you and your spouse ($125,000 for each). You owe $19,125 of self-employment tax (15.3 percent x $125,000), and so does your spouse, for a combined total of $38,250.

The problem with husband-wife partnership status in your situation is that the maximum 15.3 percent self-employment tax rate hits $125,000 of net self-employment income not once but twice (first on your Schedule SE and again on your spouse’s separate Schedule SE).

In contrast, if you could say that your business is a sole proprietorship run only by you, only you would be on the hook for the self-employment tax.

You would pay the maximum 15.3 percent self-employment tax rate on the first $137,700 of your 2020 net self-employment income, but the self-employment tax hit would be “only” $24,325 [(15.3 percent x $137,700) + (2.9 percent x $112,300) = $24,325]. That’s a lot better than the $38,250 self-employment tax hit if your business is classified as a 50/50 husband-wife partnership.

When Does the Husband-Wife Partnership Actually Exist for Tax Purposes?

Good question. As you can see from the preceding example, the self-employment tax can make the husband-wife partnership an expensive proposition. Of course, the IRS would love it if you had to treat it that way.

Not surprisingly, several IRS publications attempt to create the impression that involvement by both spouses in an unincorporated business activity usually creates a partnership for federal tax purposes.

IRS Publication 334 (Tax Guide for Small Business) says the following:

If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement.

In other words, you don’t have to believe that you have a husband-wife partnership to have a husband-wife partnership for tax purposes.

Similarly, IRS Publication 541 (Partnerships) says:

If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065.

But in many (if not most) cases, the IRS will have a tough time prevailing on the husband-wife partnership issue. Consider the following direct quote from IRS Private Letter Ruling 8742007:

Whether parties have formed a joint venture is a question of fact to be determined by reference to the same principles that govern the question of whether persons have formed a partnership which is to be accorded recognition for tax purposes. Therefore, while all circumstances are to be considered, the essential question is whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise.

The following factors, none of which is conclusive, are evidence of this intent:

the agreement of the parties and their conduct in executing its terms;
the contributions, if any, that each party makes to the venture;
control over the income and capital of the venture and the right to make withdrawals;
whether the parties are co-proprietors who share in net profits and who have an obligation to share losses; and
whether the business was conducted in the joint names of the parties and was represented to be a partnership.

In many (if not most) real-life situations where both spouses have some involvement in an activity that has been treated as a sole proprietorship, or in an activity that has been operated using a disregarded single-member LLC that has been treated as a sole proprietorship for tax purposes, only some of the five factors listed in Private Letter Ruling 8742007 will be present. Therefore, in many such cases, the IRS may not succeed in making the husband-wife partnership argument.

Regardless of the presence or absence of the other factors listed above, the husband-wife partnership (LLC) argument is especially weak when (1) the spouses have no discernible partnership agreement and (2) the business has not been represented as a partnership to third parties (for example, to banks and customers).

If You Don’t Want 100 Percent Depreciation, Elect Out or Else
As you likely know, the TCJA increased bonus depreciation to 100 percent. Unlike most tax provisions that involve a tax election, this one requires you to elect out if you don’t want it.

For example, you (or your corporation) buy two $50,000 trucks, each with a gross vehicle weight rating of 6,500 pounds and a bed length of 6.5 feet. You use the trucks 100 percent for business. Because of the weight and bed size, the trucks are exempt from the luxury passenger vehicle depreciation limits.

You have five choices on how to deduct the vehicles on your 2019 tax return (the one you are filing or about to file—we are in tax season):

Do nothing. This forces you to use bonus depreciation and deduct the entire $100,000 cost in year one. In addition, you deduct your operating expenses such as gas, oil, and insurance.
Elect out, choose Section 179 expensing of any amount of your $100,000 cost of the trucks, and depreciate the balance. For example, you could elect to deduct $30,000 of Section 179 expensing on each truck and then depreciate the remainder using MACRS. In addition, you deduct your operating expenses such as gas, oil, and insurance. (Note. The trucks are not subject to the $25,000 SUV ceiling because of their weight and bed length.)
Elect out, don’t use Section 179, and depreciate the trucks using the five-year MACRS depreciation schedule (which takes six years).
Elect out, don’t use Section 179, and depreciate the trucks using the five-year straight-line depreciation schedule (which also takes six years).
Use the 57.5 cents IRS standard mileage rate for each business mile driven. The 57.5 cents per mile rate includes operating expenses and 27 cents a mile for depreciation.

Okay, you get the big picture. Two trucks, each with a cost of $50,000 and both exempt from the luxury vehicle limits. Five choices as to the deduction.

Luxury Vehicles

Because of their gross vehicle weight, the vehicles mentioned above were exempt from the luxury vehicle depreciation limits that apply to

cars with curb weight of 6,000 pounds or less, and
SUVs, pickups, and crossover vehicles with a gross vehicle weight rating of 6,000 pounds or less.

Had the vehicles failed the weight test, their bonus depreciation for 2019 would have been limited to $18,100.

Beat the Unfair $10,000 SALT Cap with a C Corporation
C corporations cause double taxation for business owners, so you probably think you want to avoid them at all costs.

And for many of you, this is true, as the S corporation often provides the lower overall tax outcome.

But for some of you, the C corporation could provide the best tax outcome because it bypasses the $10,000 state and local tax (SALT) deduction cap, which was introduced by the Tax Cuts and Jobs Act (TCJA).

Prior to the TCJA, you could deduct as itemized deductions on your Form 1040, Schedule A—without limit—the following foreign, state, and local taxes:

Income taxes
Real property taxes
Personal property taxes
Foreign income and real property taxes

Tax reform took two direct actions against your Form 1040 itemized deductions for foreign, state, and local taxes. Beginning in tax year 2018,

you can’t deduct foreign real property taxes, and
your combined state and local income, real property, and personal property tax deductions may not exceed $10,000 ($5,000 on a married filing separate return).

If you operate your business as an S corporation, the S corporation passes its net income to your individual tax return. This causes you, the individual, to pay state income taxes on the S corporation income. Those state income taxes are subject to the $10,000 cap.

C Corporation Loophole

But there is an exception: This $10,000 limit applies only to individuals—meaning, taxes deducted on your Form 1040, Schedule A. The limit does not apply to C corporations.

If you operate your business as a C corporation, then your C corporation pays state income taxes on its net income and deducts those taxes on its corporate income tax return.

Husband-Wife Partnerships: The Tax Angles
When both members of a married couple participate in an unincorporated business venture, must it be treated as a husband-wife partnership for federal tax purposes? Answer: maybe, or maybe not. Figuring out the answer is important because it can have a huge impact on the couple’s self-employment tax situation.

Husband-wife partnerships must also file annual federal returns on Form 1065 along with the related Schedules K-1. As you know, partnership returns can be a pain. For these reasons, you generally want to avoid husband-wife partnership status when possible.

Example: Self-employment Tax Hit on Profitable Husband-Wife Partnership

Your husband-wife partnership will produce $250,000 of net self-employment income in 2020 (after applying the 0.9235 factor that reduces net income to taxable self-employment income on Schedule SE).

Assume the $250,000 is properly split 50/50 between you and your spouse ($125,000 for each). You owe $19,125 of self-employment tax (15.3 percent x $125,000), and so does your spouse, for a combined total of $38,250.

The problem with husband-wife partnership status in your situation is that the maximum 15.3 percent self-employment tax rate hits $125,000 of net self-employment income not once but twice (first on your Schedule SE and again on your spouse’s separate Schedule SE).

In contrast, if you could say that your business is a sole proprietorship run only by you, only you would be on the hook for the self-employment tax.

You would pay the maximum 15.3 percent self-employment tax rate on the first $137,700 of your 2020 net self-employment income, but the self-employment tax hit would be “only” $24,325 [(15.3 percent x $137,700) + (2.9 percent x $112,300) = $24,325]. That’s a lot better than the $38,250 self-employment tax hit if your business is classified as a 50/50 husband-wife partnership.

When Does the Husband-Wife Partnership Actually Exist for Tax Purposes?

Good question. As you can see from the preceding example, the self-employment tax can make the husband-wife partnership an expensive proposition. Of course, the IRS would love it if you had to treat it that way.

Not surprisingly, several IRS publications attempt to create the impression that involvement by both spouses in an unincorporated business activity usually creates a partnership for federal tax purposes.

IRS Publication 334 (Tax Guide for Small Business) says the following:

If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement.

In other words, you don’t have to believe that you have a husband-wife partnership to have a husband-wife partnership for tax purposes.

Similarly, IRS Publication 541 (Partnerships) says:

If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065.

But in many (if not most) cases, the IRS will have a tough time prevailing on the husband-wife partnership issue. Consider the following direct quote from IRS Private Letter Ruling 8742007:

Whether parties have formed a joint venture is a question of fact to be determined by reference to the same principles that govern the question of whether persons have formed a partnership which is to be accorded recognition for tax purposes. Therefore, while all circumstances are to be considered, the essential question is whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise.

The following factors, none of which is conclusive, are evidence of this intent:

the agreement of the parties and their conduct in executing its terms;
the contributions, if any, that each party makes to the venture;
control over the income and capital of the venture and the right to make withdrawals;
whether the parties are co-proprietors who share in net profits and who have an obligation to share losses; and
whether the business was conducted in the joint names of the parties and was represented to be a partnership.

In many (if not most) real-life situations where both spouses have some involvement in an activity that has been treated as a sole proprietorship, or in an activity that has been operated using a disregarded single-member LLC that has been treated as a sole proprietorship for tax purposes, only some of the five factors listed in Private Letter Ruling 8742007 will be present. Therefore, in many such cases, the IRS may not succeed in making the husband-wife partnership argument.

Regardless of the presence or absence of the other factors listed above, the husband-wife partnership (LLC) argument is especially weak when (1) the spouses have no discernible partnership agreement and (2) the business has not been represented as a partnership to third parties (for example, to banks and customers).

If You Don’t Want 100 Percent Depreciation, Elect Out or Else
As you likely know, the TCJA increased bonus depreciation to 100 percent. Unlike most tax provisions that involve a tax election, this one requires you to elect out if you don’t want it.

For example, you (or your corporation) buy two $50,000 trucks, each with a gross vehicle weight rating of 6,500 pounds and a bed length of 6.5 feet. You use the trucks 100 percent for business. Because of the weight and bed size, the trucks are exempt from the luxury passenger vehicle depreciation limits.

You have five choices on how to deduct the vehicles on your 2019 tax return (the one you are filing or about to file—we are in tax season):

Do nothing. This forces you to use bonus depreciation and deduct the entire $100,000 cost in year one. In addition, you deduct your operating expenses such as gas, oil, and insurance.
Elect out, choose Section 179 expensing of any amount of your $100,000 cost of the trucks, and depreciate the balance. For example, you could elect to deduct $30,000 of Section 179 expensing on each truck and then depreciate the remainder using MACRS. In addition, you deduct your operating expenses such as gas, oil, and insurance. (Note. The trucks are not subject to the $25,000 SUV ceiling because of their weight and bed length.)
Elect out, don’t use Section 179, and depreciate the trucks using the five-year MACRS depreciation schedule (which takes six years).
Elect out, don’t use Section 179, and depreciate the trucks using the five-year straight-line depreciation schedule (which also takes six years).
Use the 57.5 cents IRS standard mileage rate for each business mile driven. The 57.5 cents per mile rate includes operating expenses and 27 cents a mile for depreciation.

Okay, you get the big picture. Two trucks, each with a cost of $50,000 and both exempt from the luxury vehicle limits. Five choices as to the deduction.

Luxury Vehicles

Because of their gross vehicle weight, the vehicles mentioned above were exempt from the luxury vehicle depreciation limits that apply to

cars with curb weight of 6,000 pounds or less, and
SUVs, pickups, and crossover vehicles with a gross vehicle weight rating of 6,000 pounds or less.

Had the vehicles failed the weight test, their bonus depreciation for 2019 would have been limited to $18,100.

COMMITTEE ON FINANCE REPORT

DIVISION A – KEEPING WORKERS PAID AND EMPLOYED, HEALTH CARE SYSTEM ENHANCEMENTS, AND ECONOMIC STABILIZATION

TITLE II—ASSISTANCE FOR AMERICAN WORKERS, FAMILIES, AND BUSINESSES

Subtitle A—Unemployment Insurance Provisions

Section 2101. Short Title This title is called the Relief for Workers Affected by Coronavirus Act

Section 2102. Pandemic Unemployment Assistance This section creates a temporary Pandemic Unemployment Assistance program through December 31, 2020 to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency.

Section 2103. Emergency Unemployment Relief for Governmental Entities and Nonprofit Organizations This section provides payment to states to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur through December 31, 2020 to pay unemployment benefits.

Section 2104. Emergency Increase in Unemployment Compensation Benefits This section provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.

Section 2105. Temporary Full Federal Funding of the First Week of Compensable Regular Unemployment for States with No Waiting Week This section provides funding to pay the cost of the first week of unemployment benefits through December 31, 2020 for states that choose to pay recipients as soon as they become unemployed instead of waiting one week before the individual is eligible to receive benefits. Section 2106. Emergency State Staffing Flexibility This section provides states with temporary, limited flexibility to hire temporary staff, rehire former staff, or take other steps to quickly process unemployment claims. Section 2107. Pandemic Emergency Unemployment Compensation
This section provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available.

Section 2108. Temporary Financing of Short-Time Compensation Payments in States with Programs in Law This section provides funding to support “short-time compensation” programs, where employers reduce employee hours instead of laying off workers and the employees with reduced hours receive a pro-rated unemployment benefit. This provision would pay 100 percent of the costs they incur in providing this short-time compensation through December 31, 2020.

Section 2109. Temporary Financing of Short-Time Compensation Agreements This section provides funding to support states which begin “short-time compensation” programs. This provision would pay 50 percent of the costs that a state incurs in providing short-time compensation through December 31, 2020.

Section 2110. Grants for Short-Time Compensation Programs This section provides $100 million in grants to states that enact “short-time compensation” programs to help them implement and administer these programs.

Section 2111. Assistance and Guidance in Implementing Programs This section requires the Department of Labor to disseminate model legislative language for states, provide technical assistance, and establish reporting requirements related to “short time compensation” programs.

Section 2112. Waiver of the 7-day Waiting Period for Benefits under the Railroad Unemployment Insurance Act This section temporarily eliminates the 7-day waiting period for railroad unemployment insurance benefits through December 31, 2020 (to make this program consistent with the change made in unemployment benefits for states through the same period in an earlier section of this subtitle).

Section 2113. Enhanced Benefits under the Railroad Unemployment Insurance Act This section provides an additional $600 per week payment to each recipient of railroad unemployment insurance or Pandemic Unemployment Assistance for up to four months (to make this program consistent with the change made in unemployment benefits for states in an earlier section of this subtitle).

Section 2114. Extended Unemployment under the Railroad Unemployment Insurance Act
This section provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of regular unemployment benefits are no longer available (to make this program consistent with the change made in unemployment benefits for states in an earlier section of this subtitle).

Section 2115. Funding for the Department of Labor Office of Inspector General for Oversight of Unemployment Provisions This section provides the Department of Labor’s Inspector General with $25 million to carry out audits, investigations, and other oversight of the provisions of this subtitle.

Section 2116. Implementation This section gives the Secretary of Labor the ability to issue operating instructions or other guidance as necessary in order to implement this subtitle, as well as allows the Department of Labor to waive Paperwork Reduction Act requirements, speeding up their ability to gather necessary information from states.

Subtitle B – Rebates and Other Individual Provisions

Section 2201. 2020 recovery rebates for individuals All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits.

For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as IRS will use a taxpayer’s 2019 tax return if filed, or in the alternative their 2018 return. This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.

Section 2202. Special rules for use of retirement funds Consistent with previous disaster-related relief, the provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.

A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

Section 2203. Temporary waiver of required minimum distribution rules for certain retirement plans and accounts The provision waives the required minimum distribution rules for certain defined contribution plans (including 401-K, 403(b), 457(b) plans) and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19. NOTE: This is a true waiver. The taxpayer does not need to make up the distribution next year.

Section 2204. Allowance of partial above the line deduction for charitable contributions The provision encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.

Section 2205. Modification of limitations on charitable contributions during 2020 The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50-percent of adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent limitation is increased to 25 percent of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent.

Section 2206. Exclusion for certain employer payments of student loans The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.

Subtitle C – Business Provisions

Section 2301. Employee retention credit for employers subject to closure due to COVID-19

The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

Section 2302. Delay of payment of employer payroll taxes The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.

Section 2303. Modifications for net operating losses The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.

Section 2304. Modification of limitation on losses for taxpayers other than corporations The provision modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.

Section 2305. Modification of credit for prior year minimum tax liability of corporations The corporate alternative minimum tax (AMT) was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several
years, ending in 2021. The provision accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.

Section 2306. Modification of limitation on business interest The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.

Section 2307. Technical amendment regarding qualified improvement property The provision enables businesses, especially in the hospitality industry, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act, not only increases companies’ access to cash flow by allowing them to amend a prior year return, but also incentivizes them to continue to invest in improvements as the country recovers from the COVID-19 emergency.

Section 2308. Temporary exemption from excise tax for alcohol used to produce hand sanitizer The provision waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration and is effective for calendar year 2020.

I realize that there is a lot to digest in this letter especially with regards to, “The Coronavirus Aid, Relief and Economic Security (‘CARES”) Act. If you have questions, please give me a call.

Respectfully,

Al Whalen, EA, ATA, CFP®
al@whalengroup.com
Web Site: www.whalengroup.com

THE WHALEN GROUP YEAR-END TAX PLANNING FOR 2019

BUSINESS TAX ISSUES

Prepay Expenses Using the IRS Safe Harbor   You just have to thank the IRS for its tax-deduction safe harbors.  IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS, (IRS Reg. 1.263(a)-4(f).  Under this safe harbor, your 2019 prepayments cannot go into 2021. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include, among others, lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example.  You pay $3,000 a month in rent and would like a $36,000 deduction this year.  So on Tuesday, December 31, 2019, you mail a rent check for $36,000 to cover all of your 2020 rent.  Your landlord does not receive the payment in the mail until Thursday, January 2, 2020. Here are the results:

  1.  You deduct $36,000 in 2019 (the year you paid the money).
  2. The landlord reports $36,000 in 2020 (the year he received the money).

The landlord gets what he wants – next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.

Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2019, he would have had to pay taxes on the rent money in 2019.

Before sending a big rent check to your landlord, make sure the landlord understands the strategy.  Otherwise, he might not deposit the rent check (thinking your payment was a mistake) and instead might return the check to you. This could put a crimp in the strategy, because you operate on a cash basis.

Also, think “proof”. Remember, the burden of proof is on you.  How do you prove that you mailed the check by December 31st ?  Think like the IRS auditor or, better yet, a prosecuting attorney.

Answer:  Send the check using one of the postal service’s tracking delivery methods, such as priority mail with tracking and possibly signature required , or one of the old standards, such as certified or registered mail.  With these types of mailings, you have proof of the date that you mailed the rent check. You also have proof of the day the landlord received the check.

Stop Billing Customers, clients, and Patients  Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year:  stop billing your customers, clients, and patients until after December 31, 2019. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, and patients, and insurance companies generally don’t pay until billed.  Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.  Example.  Will Maket, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December , he sends no bills.  Instead, he gathers up those bills and mails them the first week in January. Presto! He just postponed paying taxes on his December 2019 income by moving that income to 2020.

Buy Office Equipment  With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2019.

Qualifying bonus depreciation and Section 179 purchases include, among others; new and used personal property such as machinery, equipment, computers, desk, furniture, and chairs (and certain qualifying vehicles).

PLANNING TIP:  Remember, the equipment need only be placed in service prior to the end of the year, it does not have to be completely paid for.  That’s right, you could pay a minimum down 

payment yet get a 100% deduction.

Use Your Credit Cards  If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense, (Rev. Rul. 78-38).  Therefore, as a Schedule C taxpayer, you should consider using your credit cards for last minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies:  the date of the charge is the date of the deduction for the corporation, (Ibid).

But if you operate your business as a corporation and you are the personal owner of the card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement.  Thus, submit your expense report and have the corporation Cash Method Of Accounting on make its reimbursement to you before midnight on December 31.

Retirement Plans  Owners of companies should consider putting retirement plans into service before December 31.  They may be funded in 2020 for 2019 if started by year-end.

Dividend VS. Salary Owners of regular corporations should consider taking a dividend as opposed to salary.  If the corporation is in a lower tax bracket than the owner’s personal income tax bracket the owner gets a preferential tax advantage on the dividend and the corporation avoids payroll taxes.  This only works with C -Corporations.

Don’t Assume You Are Taking Too Many Deductions  If your business deductions exceed your business income, you have a tax loss for the year.  With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL, (IRS Section 172(d)2018).

If you are just starting your business, you could very possibly have an NOL.  You could have a loss year even with an ongoing and successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years; however, the Tax Cuts and Jobs Act eliminated this provision,(IRC Section 172(b)(1)(A) (i) 2018). Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year,(IRC Section 172(a)(2)2018).

Small Business New Rule  IRC Section 199A was added to the Code for years after 2017. Taxpayers other than C-corporations may be entitled to a deduction of up to 20% of their qualified business income.  If taxable income does not exceed $321,480 for a married couple filing jointly, $160,700 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law; accounting, health, actuarial science, consulting services, performing arts, athletics, financial services, investment management, trading services, dealing in securities, partnership interests, commodities, or any business where principal asset is the reputation or skill of one or of its employees), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.  The limitations phase out for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500.

PLANNING TIP:  Taxpayers may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phase out of the deduction) for 2019.  Depending on their business model, taxpayers also may be able to increase the new deduction by increasing W-2 wages before year-end.

Cash Method Of Accounting   More “Small Business” are able to use the cash method of accounting in 2018 and later years than were allowed to do so in the past.  To qualify as a “Small Business” a taxpayer must, among other things, satisfy a gross receipts test. Effective for tax years beginning after December 31, 2017, the gross receipts test is satisfied if, during a three year test period, average annual gross-receipts don’t exceed $25 million (the dollar amount use be $5 million).  Cash method taxpayer may find it a lot easier to shift income, for example, by holding off billing till next year or by accelerating expenses, paying bills early or by making certain prepayments.

Bonus Depreciation  Finally a deduction for business that makes sense,  Business can claim a 100% bonus first-year depreciation for machinery and equipment – bought and placed in service, new or used (with some exceptions) after September 17, 2017 and before January 1, 2023.  That means 100% of cost whether paid off or not placed in service this year is fully deductible. As a result, the 100% bonus first-year write off is available even if the qualifying asset is in service even one day in the year. The bonus reduces to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and no bonus after 2026.

Expensing 179  Businesses should consider making expenditures that qualify for the liberalized business property expensing option.  For tax years beginning in 2018, the expensing limit is $1,020,000 and the investment ceiling is $2,550,000. Expensing is generally available for most depreciable property (other than buildings), and off-the-shelf computer software.  Expensing is also available for qualified improvement property (generally, any interior improvement to a building’s interior, but not enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and HVAC, fire protection, alarm, and security systems.  Expensing deduction is available (provided you are otherwise eligible to take it) regardless of how long the property is held during the year. This can be a powerful planning tool, thus property placed in service even the last day of 2019 gets the deduction if elected. The election is made when filing your 2019 tax return in 2020 by the due date of your return including extension.

De Minimis Safe Harbor Election Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the cost of lower-cost assets, materials and supplies, assuming the cost does not have to be capitalized under Code Sec. 263A uniform capitalization (UNICAP) rules.  To qualify for the election, the cost off a unit of property can’t exceed $5,000 if taxpayer has applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, consider purchasing such qualified items before the end of 2019.

PLANNING TIP:  The purpose of this election is to reduce the depreciation of small asset acquisitions used in your trade or business.  This is another form of expensing, and there is no recapture of depreciation when the asset is disposed of later.

Employee Meals:  IRC Sec 274(n) Employee meals were 100 percent deductible now meals are limited to 50 percent deductible.

Entertainment Expense:  IRC Sec 274(a); 274(e) Entertainment directly related to a trade or business was 50 percent deductible. Now, entertainment is no longer deductible.

INDIVIDUAL TAX ISSUES

Individuals Who Are 70 ½ Years Of Age Or Older  In this calendar year you must take a Required Minimum Distribution (RMD) from their IRA by December 31st .  There is a 50% penalty tax for forgetting this provision.  The only exception to this rule is the year you first turn 70 ½ you may wait until April 15th of the following year, however, you must make two distributions in that next year if you use this delay of distribution. 

PLANNING TIP:  Take advantage of a charitable break for IRA owner’s that’s now perinate in the law.  Individual’s 70 ½ and older can transfer as much as $100,00 annually from their IRAs directly to a qualifying charity.  If married, you and your spouse can give up to $100,000 each from your separate IRAs. The benefits here are: 1) This distribution also qualifies toward your RMD requirements, 2) This distribution in not taxable to you, 3) This amount of IRA is forever removed from future income and estate tax, and 4) The charity of your choice benefits from your generosity.  This planning is a WIN, WIN, WIN, WIN, when used properly, remember the distribution must go from the IRA directly to the charity, you cannot receive the funds and then write a check to the charity for this to work.  All IRA account custodians will have the necessary forms. NOTE: This provision is just for IRAs, therefore, if you have 401Ks, 403Bs, 457 plans, pension, profiting sharing or qualified plans you must transfer the funds to an IRA rollover account first then directly transfer to the charity.

Higher-Income Earners remember the top marginal tax bracket is now 37%, however, the Tax Cuts and Jobs Act (TCJA) did not eliminate the surtax of 3.8% on certain unearned income. The surtax is the lesser of: 1) net investment income (NII), or 2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for married filing separate, and $200,000 in any other case).  The IRS does not index these ACA thresholds for inflation. NII included capital gains and Section 475 ordinary income.

PLANNING TIP:  Long-term Capital Gains are most likely the issue to get the surtax, many taxpayers that normally have adjusted gross income under $250,000 do not experience the surtax until they have a large long-term capital gain tax.  One way to either reduce or eliminate the surtax is to consider an installment sale. Example: You sell a piece of real estate for $110,000 with a basis of $10,000, therefore, you have a gain of $100,000, you could spread the gain over two years by receiving half this year and half next year, this is especially good towards the end of the year.  Now let’s further assume your adjusted gross income is $200,000, by spreading the $100,000 gain over two years you would not experience the surtax of 3.8% at all.

Estimated Tax And RMDs Individuals who must pay estimated tax and need to take RMD’s from retirement accounts or IRA distributions can elect to have up to 100% of the distribution go to income tax withholding, this possibility eliminates the need to pay estimated tax installments using Form 1040-ES. This is especially effective is you take the distribution near year end as the IRS considers the withholding as if it had been timely withheld throughout the year.

Take Advantage Of Capital Gains Rules Long-term capital gain from sale of asset held over one year and qualifying dividend is taxed at 0%, 15%, or 20%, depending on the taxpayer’s taxable income. The 2019 long-term capital gains rate are 0% for taxable income under $39,375 single, and $78,750 married filing jointly. The 15% capital gains rate applies to taxable income up to taxable income up to $434,550 for filing single and $488,850 married filing jointly.  The top bracket rate of 20% applies to gains above those amounts.

PLANNING TIP: Zero-percentage-rate gains and dividends produce increased adjusted gross income (modified adjusted gross income) which can cause more of your social security to be subject to income tax.

ROTH IRA Conversion:  Convert a traditional IRA into a ROTH IRA before year-end to accelerate income.  The conversion income is taxable in 2019, but the 10% excise tax on early withdrawals before age 59 ½ is avoided providing, you pay the conversion taxes from outside the ROTH plan.  One concern is that TCJA repealed the recharacterization option; you can no longer reverse it if the plan assets decline after conversion. There isn’t an income limit for making ROTH IRA conversions.

PLANNING TIP: When to use this type of planning:

  1. When income declines in the current year, do to reduction of income from salary.
  2. When retirement income in less than your prior working income.
  3. When your business (non-C Corporation) income produces a net-operating loss (NOL) for the year. Convert enough IRA income to reduce your taxable income to zero after considering the standard deduction.
  4. When the IRA investment suffers a large decline in value.

Use Of FSA and HSA Plans: Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.  If you become eligible in December of 2019 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2019. The HSA 2019 limits are; $3,500 for self-only coverage and $7,000 for family coverage, People age 55 or older get $1,000 more.

Review Your Investment Portfolio For Possible Tax Savings Adjustments:  If you are considering taking profits in your portfolio, then make sure that you balance gains and losses to reduce the tax.  Now is the time to reduce underperforming investments as an offset against the winners. Remember losses offset gains dollar for dollar, any excess losses are deductible up to $3,000 the balance must be carried forward until used up or your death whichever comes first.

PLANNING TIPS:  If you hold under performing stock positions and have an unrealized loss, you could sell the stock experiencing a capital loss and then repurchase the same stock after 31 days and avoid the WASH LOSS rules.  If repurchased prior to 31 days, then your stock price gets adjusted and no loss is recognized.

Gifting To Avoid Gift Tax:  Consider making gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift or estate taxes.  The exclusion applies to gifts up to $15,000 made in 2019 to each of an unlimited number of individuals. There is an unlimited transfer directly to educational institutions for tuition (not considered a gift), or unlimited transfer to medical care providers (not considered a gift).  You cannot carryover unused exclusions from one year to the next. Such transfers may save family income taxes where income earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

PLANNING TIP:  Many may prefer CASH, however, consider appreciated stocks, mutual funds or other appreciated assets.  Remember the transfer of these assets are transferred at FMV so keep the FMV at $15,000 or under. The basis of the asset transfers as well, example you own a stock position that has a market value of $15,000 with a cost basis of $5,000 for a gain of $10,000, and you transfer to an individual that is in a ZERO capital gains bracket then the $10,000 gain would not be taxable.  Remember there are three capital gains brackets; 0%, 15%, and 20% depending upon your adjusted gross income.

Divorce Under The Tax Cuts and Jobs Act (TCJA):  Tax reform changes the alimony game.  TCJA eliminates tax deductions for alimony payments that are required under post 2018 divorce agreements.  More specifically, the TVJA new denial of alimony tax deductions applies to payments required by divorce or separation agreements; 1,) Executed after December 31, 2018, or 2.) Modified after that date, if the modification specifically states that the new TCJA treatment of alimony payments now applies.  When alimony payments are not deductible by the person paying them, they are not taxable to the one receiving the payments.

Education Planning Changes:  There are two ways to help your kids or grandkids with their education.  

  1. Contributing to a 529 plan is one option, you can shelter from gift tax as much as $75,000 in a single year per beneficiary ($150,000 if your spouse joins in). I you contribute the maximum, you will be treated as gifting $15,000 (or $30,000) per beneficiary in 2019 and in each of the next four years.  Payments are excluded from your estate as long as you live through the fifth year. PLANNING TIP:  Now the 529 Plans are not just for college, tax free distributions of up to $10,000 can now be taken each year to help pay for private parochial K-12 tuition.  The $10,000 cap does not apply to 529 plan withdrawals to pay for college.
  2. Paying a person’s tuition directly to the school is tax-favored, too. The payment is not treated as gift for purposes of the gift tax rules.  

Remember The Sunset Rules for Gift and Estate Taxes:  Continuing the planning conversation about gifting, the current increased estate, gift, and generation-skipping transfer tax exclusions under TCJA are scheduled to sunset effective January 1, 2026 (or potentially sooner, depending upon the outcome of the 2020 presidential election.  If this law is not extended then it defaults to the rules in place in 2010 adjusted for inflation. Why is this important? Because currently the estate and gift tax exclusion is $11,400,000 and that drops back to $5,000,000 adjusted for inflation, therefore, gifting large amounts now may be very important for large estates.

Charitable Contribution Limits Changed: Prior to 2018 cash contributions were limited to 50% of your adjusted gross income, any excess got carried over for up to the next 5 years then lost if unused.  The 50 % limit is now 60% for years after 2017.

Home Mortgage Interest:  IRC Sec 163(h) prior to ACJA you could deduct interest payments on up to $1 million in acquisition indebtedness and up to $100,000 of home equity interest. Now, for tax years 2018 through 2915:  1,) You can deduct interest payments on up to $750,000 in acquisition indebtedness for homes purchased after December 14, 2017, 2,) You can deduct up to $100,000 of home equity interest, but only if funds are used to buy, build, or substantially improve the home.

Hobby Deductions:  IRC Sec 183 Hobby expenses could be deducted as miscellaneous itemized deductions subject to the 2 percent-of-AGI threshold.  Now, hobby expenses that don’t qualify as cost of sales are not deductible.

OTHER TAX ISSUES

Who Pays What Of Our Federal Income Tax:  The IRS released the 2017 “share of income and share of Federal Income Taxes Paid” report:

Top 1% income earners  with AGI of $515,371 or greater paid 38.47% of tax
Top 5% income earners with AGI of $208,053 or greater paid 59.14% of tax
Top 10% income earners with AGI of $145,135 or greater paid 70.08% of tax
Top 25% income earners with AGI of $83,682 or greater paid 86.1% of tax
Top 50% income earners with AGI of $41,740 or greater paid 96.89% of tax
Bottom 50% income earners with AGI of less than $41,740 paid 3.11% of tax

NOTE:  In the 2016 report to be in the top 1% of income earners your AGI was $480,804 or above and to be in the bottom 50% your AGI had to be below $40,078. The question is always in our “progressive system” of taxation, how much should someone that makes more than me be paying  for the benefits that we all have? What is really fair? The percentage is relative, if the country needs more money to operate, then collect it from someone other than me, is how many feel.

If you wish to know where you fit into this system, just go to your 2017 income tax return and look at your Adjusted Gross Income (AGI) then you will know.

Social Security COLA Increase: Given that Social Security is our country’s most successful social program, and that 62% of retired workers are netting at least half of their income from their Social Security benefit, all eyes were on Oct. 10. That’s because Oct. 10 is the release date for the U.S. Bureau of Labor Statistics’ (BLS) September inflation data, which contains the last puzzle piece needed to calculate Social Security’s cost-of-living adjustment (COLA) for 2020.  The BLS reported September’s inflation data, allowing for the concrete announcement that Social Security’s COLA in 2020 will be rising by 1.6%. Now just pray that the increase in Medicare cost are less than this increase.

This letter will be posted on the Web Site: www.whalengourp.com.  Please share with friends, that’s the greatest compliment I can receive.

I wish all my clients, friends and family a Very Happy Thanksgiving.  We have so much to be thankful for here in America yet it is also a time to remember those less fortunate, those suffering from illness, storms, fires, and other issues.  Happy Thanksgiving to all.

Respectfully,
Al Whalen, EA, ATA, CFP®

Attachment:

  The Tax Book Inflation Adjustments for 2019

Sources:
The Tax Cuts and Jobs Act of 2017
Wolters Kluwer CCH CPE Link
CPECredit.com
The Tax Foundation
Internal Revenue Code and Regulation
IRS, Statistics of Income, Individual Income Rates and Tax Shares (2019)
The Bradford Tax Institute
National Taxpayers Union Foundation
The Tax Book