Right now is a very good time to gift. It’s a good idea to get any appreciation out of their potential estate and move tax-free dollars to their kids. Among other advantages, based on the way taxes are calculated, you pay estate tax on the entire estate, but for gift taxes, you only pay tax on what’s transferred, according to Mandelker.

Of course, the biggest motivation is the likely change in tax and exemption rates with the coming change in the executive branch. “We’re in a situation now where there is a need to raise revenue, and a Biden administration has indicated they will look to increase taxes to do so … Traditionally, transfer taxes are a good source of raising revenue. They’re an available resource even if they’re not that huge.”

Naturally, the lifetime exemption, now at $11.5 million, will be a target. The $11.5 million exemption is set to sunset in January 2026. 

There is a risk in waiting too long to make a gift, if legislation is passed, we don’t know when it will be effective. It might be effective the day it is signed, or it could be retroactive to Jan. 1, 2021. That’s why we’re telling people to get it done before the end of the year. If they can’t do that, do it as soon as possible. They don’t want to be on the wrong side of the effective date and lose the benefit of the increased exemption.”

Raising tax rates and decreasing exemptions are both easy ways to increase revenue, Mandelker observed: “But from things they mentioned during the campaign, and from proposals that were made during the Obama administration that were never enacted, they were looking to use both the hammer and the scalpel. So the focus will also be on some of the tools that estate planners use.”

For example, Mandelker cited grantor-retained annuity trusts. Under a GRAT, the grantor sets up an irrevocable trust for a designated period of time. The grantor receives an annuity every year, and the beneficiaries receive the assets in the trust tax-free at the end of the term. The value of the gift made is equal to the value of the property put in reduced by the value of the property taken back in the form of the annuity. The object in calculating the payout to the grantor is to set it high enough so that the actuarial value to the beneficiaries is as close to zero as possible.

“The determination of the value of the annuity is based on the IRS rates for the month the transfer is made, called the IRS Section 7520 or “hurdle” rate. “The hurdle rate is currently 0.4 percent,” Mandelker observed. “So if the assets in the trust increase faster than the hurdle rate, there’s actually a larger gift to the beneficiaries.”

“The Obama administration, and presumably Biden, wanted to cut back on the effectiveness of GRATs and other planning tools,” he said. “They proposed making the trusts last for a specific amount of time; for example, 10 years. If the person setting up the trust dies during the term, the estate tax benefit is lost. It’s more likely that the grantor will die within that period than if they’re only required to live two years. Another proposal was that the grantor has to make some sort of taxable gift. We don’t know what the minimum requirement would be, but the grantor would not get the full benefit of the increase above the hurdle rate. Under Biden, the Obama proposals would quite possibly be resurrected.”

To avoid these issues, the client should be making these gifts as soon as possible, Mandelker emphasized. “It’s safer to make the gift in 2020 than to wait until 2021 to make the gift,” he said. “And if you must make the gift after the first of the year, do it as soon as possible.”

For more information visit: https://www.accountingtoday.com/news/gifting-and-taxes-the-sooner-the-better

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It’s none too soon to review investment strategies that will keep money in your pocket and out of the IRS’s till, which is, after all, what tax planning is all about. What follows are some reminders on opportunities to save on taxes for this year and even gain a head start on next year.

Year-end stock gains. Sell some shares during the last week of December and you’ll probably not receive payment until early in 2021. This kind of sale often straddles the year-end because the New York Stock Exchange and other securities markets generally require five full trading days from the trading date to the settlement date.

At one time, the law allowed you to choose to report the gain from a last-week-in-December sale in the year of the trade date or the year of the settlement date. Now, however, you’ve no choice. You must report the profit in the year the trade takes place, regardless of when the settlement takes place. To shift the gain from this year, delay the sale until next year. As for capital losses, the rules are unchanged. Report a loss in the year the trade occurs.

Re-evaluate your investments from a tax standpoint. Do you fall into a lofty combined federal, state and, perhaps, city tax bracket because you live or work in a high-tax place? If so, it might make sense to switch from fully taxable investments, such as certificates of deposit, to municipal bond funds or other tax-exempt investments.

Capital losses. The IRS imposes tight restrictions on deductions for those kinds of losses. It allows you to offset capital losses against capital gains and up to $3,000 of ordinary income.  The law allows you to carry forward any unused net loss over $3,000 into the following year and beyond, should that be necessary.

Wash sales. Be mindful of a limitation when you sell shares to establish a tax loss and want to maintain a position in the same company. At least 31 days must elapse between the sale and the repurchase. If they don’t you’ll run afoul of the wash sale rule and forgo your loss for the time being.

An often-misunderstood point: This restriction doesn’t apply to a profit on the sale of shares of stock. You’re free to take your profit and immediately reinvest.

The wash sale rule comes into play only when you suffer a loss on the sale of shares of stock (including shares of a mutual fund) or securities and then purchase, or buy an option to purchase, “substantially identical” stock or securities. If you do so within 30 calendar days (not trading days when the market is open) before or after the sale date, a total period of 61 days, you’ll not be able to use that loss to offset other capital gains until you sell the newly acquired investment. The wash sale rule also applies to an option to sell stock or securities.

For more information please visit: https://www.accountingweb.com/tax/individuals/end-of-year-tax-strategies-for-investors

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Taxpayers who owe taxes and could not pay have always had options such as installment agreements and offers in compromise, but now they have more options. The highlights of the Taxpayer Relief Initiative, according to the IRS: 

• Taxpayers who qualify for a short-term payment plan option may now have up to 180 days to resolve their tax liabilities instead of the usual 120 days. 
• The IRS says it will offer more flexibility for taxpayers who are temporarily unable to meet the payment terms of an accepted offer in compromise. 
• The IRS will automatically add certain new tax balances to existing installment agreements for individuals and for business taxpayers who have gone out of business. This will occur instead of having taxpayers default on their agreements. 
• Certain qualified individual taxpayers who owe less than $250,000 may set up installment agreements without providing a financial statement or substantiation if their monthly payment proposal is sufficient. 
• Some individual taxpayers who owe only 2019 taxes and owe less than $250,000 may qualify to set up an installment agreement without having a Notice of Federal Tax Lien filed by the IRS. 
• Qualified taxpayers with existing direct debit installment agreements may now be able to use the online payment agreement system to propose lower monthly payment amounts and change their payment due dates. 
• Taxpayers who cannot pay can contact the IRS to request a temporary halt in collection efforts, which the IRS will grant if the taxpayer is currently unable to pay. 

Reasonable cause and first-time abatement 

The IRS initiative is also highlighting reasonable-cause relief from penalties for taxpayers with failure-to-file, failure-to-pay, and failure-to-deposit penalties. First-time abatement penalty relief is also available to taxpayers the first time they are subject to the penalty. The AICPA requested an expedited process for installment agreements and recommended delays in IRS collection activities.

For more information please visit: https://www.journalofaccountancy.com/news/2020/nov/irs-help-with-tax-debt-during-coronavirus-pandemic.html or contact us.

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In actuality, the new Form 1099-NEC isn’t entirely “new.” It’s an updated version of a form that was discontinued in the 1980s. But this new form may cause some unexpected headaches for business filers next year.

Background information: Previously, business entities used Form 1099-MISC to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. Yet, there are numerous other uses for Form 1099-MISC.

For instance, a business must report other income, like bonuses paid to salespeople at car dealerships, in Box 3. The nonemployee compensation paid to outside workers was reported in Box 7.

Now Form 1099-NEC has been reintroduced to avoid confusion caused by separate deadlines for Form 1099-MISC reporting of nonemployee compensation in Box 7 and all other Forms 1099-MISC. As a result, the IRS announced last year that it was resurrecting Form 1099-NEC for the 2020 tax year and thereafter. Note that this change applies to businesses of all sizes ranging from corporate conglomerates to neighborhood delis and bakeries. 

Generally, payers must file Form 1099-NEC by January 31 of the year following the year in which the services were performed. In 2020, the filing deadline will be February 1, 2021 as January 31 will fall on a Sunday. Although there’s no automatic 30-day extension to file Form 1099-NEC, an extension to file may be available for taxpayers experiencing hardships.

Another wrinkle: According to Publication 1220 recently released by the IRS, the restored Form 1099-NEC won’t be covered by the IRS 1099 Combined Federal/State Filing Program (CF/SF). Under the CF/SF Program, the IRS forwards data from certain key forms to the appropriate states.

Without this assistance, business entities may end up scrambling to meet state filing requirements or deadlines. The exact rules vary from state-to-state. Be forewarned!

For more information please visit: https://www.accountingweb.com/tax/irs/form-1099-nec-officially-replaces-1099-misc-for-reporting-payments-to-nonemployees

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It is important to have a CPA during tax negotiations because these factors are not obvious, and they are indirectly related to the items in your spouse’s financial assets. For example, who would think to examine a list of vendors for proper Form 1099-MISC documentation? I’ll tell you who… a good CPA who is familiar with divorce proceedings. 

The amount and the number of the assets involved will determine what is at stake. Our advice is to consider the list of financial assets as a starting point and tell your attorney you’d like to have your CPA do a review from a tax and financial perspective.              

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For companies that have gone remote, a new development of work-from-home is state tax nexus. Working in one municipality and living in another is nothing new. But now a large chunk of the workforce is working in one state and living in another.

Typically, tax nexus is based on where employees physically perform services (although other factors can come into play). For example, an employee living and working at a business based in State A will have income tax withheld for State A. 

But if that same State A business now has employees performing working at home in State B, it now has an income tax, payroll tax, and possibly a sales tax nexus in State B, meaning it would technically need to file there as well. 

Managing this situation can get really sticky in states that have similar income tax laws, but tax rates that are different. For example, big cities tend to have a much higher tax rate than their closest neighbors. Larger firms will have more resources to throw behind a comprehensive study to fully understand their state-level tax exposures. But some smaller companies may not want to, or cannot afford to pay for a full nexus study to identify where they should file.

The financial effects can be significant. If a company has nexus in a certain state and doesn’t file tax returns in that state, the state can go after that company indefinitely with no statute of limitations. Why? Because the statute of limitations generally starts on the date a company filed its returns. 

Currently, many states are under financial difficulty having had to deal with health-related issues, business closures and unemployment claims will look for other sources of income and combine that with the virtually unlimited look-back for nexus tax issues, this could be a recipe for future tax headaches for years to come.

Ultimately, there is no way around this without vigilance. CPA firms are going to have to delve deeply into the intricacies of each of their client’s businesses to determine; the states their clients operate in, how many employees work in different jurisdictions, and other important details, are doomed to see complications next reporting season. This is one headache, that if we’re proactive, can be avoided.

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The IRS is setting the record straight. In addition to previously announced filing extensions, it is also extending the second quarter due date for estimated tax payments—normally, June 15—to July 15, as well as providing more flexibility for other taxpayers (IR-2020-66, 4/9/20).

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