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ABLE accounts are a valuable benefit for taxpayers with disabilities


Living with a disability can come with additional expenses. Achieving a Better Life Experience accounts are authorized tax-advantaged 529A accounts that help disabled people pay qualified disability-related expenses.


Here are some key things people should know about these accounts.

Annual contribution limit
• The limit remains $15,000 in 2020.

• Certain employed ABLE account beneficiaries may make an additional contribution up to the lesser of these amounts:
The designated beneficiary’s compensation for the tax year

The poverty line for a one-person household. For 2020, this amount is $12,490 in the continental U.S., $15,600 in Alaska and $14,380 in Hawaii.


Saver’s credit

• ABLE account designated beneficiaries may now be eligible to claim the saver's credit for a percentage of their contributions.

• The beneficiary claims the credit on Form 8880, Credit for Qualified Retirement Savings Contributions. The saver’s credit is a non-refundable credit available to individuals who meet these three requirements:

Are at least 18 years old at the close of the taxable year

Are not a dependent or a full-time student

Meet the income requirements

Rollovers and transfers from section 529 plans
• Families may now roll over funds from a 529 plan to another family member’s ABLE account.

• The ABLE account must be for the same beneficiary as the 529 account or for a member of the same family as the 529 account holder. Rollovers from a section 529 plan count toward the annual contribution limit. For example, the $15,000 annual contribution limit would be met by parents contributing $10,000 to their child’s ABLE account and rolling over $5,000 from a 529 plan to the same ABLE account.


Qualified disability expenses
• States can offer ABLE accounts to help people who become disabled before age 26 or their families pay for disability-related expenses. These expenses include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services.

• Though contributions aren’t deductible for federal tax purposes, distributions, including earnings, are tax-free to the beneficiary, as long as they are used to pay qualified disability expenses.



Self-supporting college students may qualify for an Economic Impact Payment


Any eligible self-supporting college student who doesn't need to file a tax return should register using the Non-Filers tool by 3:00 p.m. ET November 21 to receive an Economic Impact Payment before the end of this year.


Generally, a self-supporting student who registers will receive a $1,200 payment if they are single or $2,400 if married and file a joint return and the student or their spouse cannot be claimed as a dependent. If they have dependent children, they may also get an additional $500 for each qualifying child.


Only self-supporting students who are not required to file a tax return should use the Non-Filers tool. Dependent students do not qualify. This means any student who is claimed as a dependent by their parents or someone else cannot get a payment.


Recent college graduates may not have received an Economic Impact Payment because they were claimed as a dependent by their parents or someone else. If their situation changes, these graduates may be eligible for the Recovery Rebate Credit when they file their 2020 tax return in 2021.


People who don't normally file a tax return may be able to register for an Economic Impact Payment quickly using the Non-Filers tool on


Students who need to or want to file a regular tax return should not use the Non-Filers tool. This includes any student who had federal income tax withheld from their pay and wants to file a tax return to claim a refund. Working students who have a summer or part-time job should consider filing a tax return so they can receive a potential federal tax refund.


Anyone using the Non-Filers tool can speed up the arrival of their payment by choosing to receive it by direct deposit. Those not choosing this option will get a check.

People can track the status of their payment using the Get My Payment tool starting two weeks after they register.


Anyone who misses the November 21 deadline will have to wait until next year to claim the Recovery Rebate Credit, if they’re eligible, when they file their 2020 federal income tax return.




How the CARES Act changes deducting charitable contributions


Whether taxpayers are supporting natural disaster recovery, COVID-19 pandemic aid or another cause that’s personally meaningful to them, their charitable donations may be tax deductible. These deductions basically reduce the amount of their taxable income.


Here’s how the CARES Act changes deducting charitable contributions made in 2020:

Previously, charitable contributions could only be deducted if taxpayers itemized their deductions.


However, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations. For the purposes of this deduction, qualifying organizations are those that are religious, charitable, educational, scientific or literary in purpose. The law changed in this area due to the Coronavirus Aid, Relief, and Economic Security Act. 


The CARES Act also suspends limits on charitable contributions and temporarily increases limits on contributions of food inventory. More information about these changes is available on




Tax Lies and Misleading Tax Claims

by James Edward Maule


It pops up all over social media. It shows up time and again on facebook. It’s a meme that says, “Biden wants to put a 3% annual federal tax on your home. Do you want him for POTUS?” A variant, somewhat more precise in its claim, states, “Biden wants to put a 3.0 % Annual (Yearly) Federal Tax on the Value of your Home.”


Biden has not made any such proposal. Every organization and individual that has fact-checked the claim has concluded it is baseless.


Why would someone claim that he has? It’s simple. When truth doesn’t work to their advantage, some people turn to lies. Consider this example from a long time ago:


Parent: “Stop chewing your fingernails.”


Child: “Why?”


Parent: “It looks bad, and if your nails are dirty it can be unhealthy.”


Child: “I don’t care.”


Parent, frustrated: “And, by the way, one of your nails, but no one knows which one, is poison and chewing on it will kill you.”


Because the truth didn’t work, rather than exerting effort to find another, honest, approach to dissuading the child from fingernail-chewing, the parent turned to a falsehood. And what happens when the child learns, later, that the parent lied?


A similar absurdity pops up in political ads favoring Donald Trump. The ads contain a clip of Biden saying, “I’m going to raise taxes,” and then cuts to several people bemoaning the horrors of increased taxes and complaining how that will hurt them. Of course, the ad took Biden’s statement, “I’m going to raise taxes on people with incomes over $400,000” and clipped off the second part of the sentence. Of course, the people in the ads complaining about tax increases are portrayed as individuals who surely are not earning more than $400,000 annually. The point of the ad is, again, fear generated by a false or misleading statement.


I wonder how the liars and manipulators would feel if they were asked, “Did you rob the bank?” and they replied “Absolutely not,” and then discovered that someone cropped their words so that when asked, “Did you rob the bank?” their answer would show up as “Absolutely.” I suspect they would be screaming foul more loudly than anyone reacting to their mendacious political advertising.


Of course, if Americans were sufficiently educated about everything that matters, took the time to do research, made the effort to think critically, and troubled themselves to engage in critical analysis, the lies and misleading statements would have no effect. The purveyors of these lies and misleading statements would either fade out of the picture or learn to tell the truth and construct arguments based on truth.




ABLE accounts are a valuable benefit for taxpayers with disabilities


Living with a disability can come with additional expenses. Achieving a Better Life Experience accounts are authorized tax-advantaged 529A accounts that help disabled people pay qualified disability-related expenses.


Here are some key things people should know about these accounts.

Annual contribution limit

  • The limit remains $15,000 in 2020.
  • Certain employed ABLE account beneficiaries may make an additional contribution up to the lesser of these amounts:
    • The designated beneficiary’s compensation for the tax year
    • The poverty line for a one-person household. For 2020, this amount is $12,490 in the continental U.S., $15,600 in Alaska and $14,380 in Hawaii.


Saver’s credit

  • ABLE account designated beneficiaries may now be eligible to claim the saver's credit for a percentage of their contributions.
  • The beneficiary claims the credit on Form 8880, Credit for Qualified Retirement Savings Contributions. The saver’s credit is a non-refundable credit available to individuals who meet these three requirements:
    • Are at least 18 years old at the close of the taxable year
    • Are not a dependent or a full-time student
    • Meet the income requirements


Rollovers and transfers from section 529 plans

  • Families may now roll over funds from a 529 plan to another family member’s ABLE account.
  • The ABLE account must be for the same beneficiary as the 529 account or for a member of the same family as the 529 account holder. Rollovers from a section 529 plan count toward the annual contribution limit. For example, the $15,000 annual contribution limit would be met by parents contributing $10,000 to their child’s ABLE account and rolling over $5,000 from a 529 plan to the same ABLE account.


Qualified disability expenses

  • States can offer ABLE accounts to help people who become disabled before age 26 or their families pay for disability-related expenses. These expenses include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services.
  • Though contributions aren’t deductible for federal tax purposes, distributions, including earnings, are tax-free to the beneficiary, as long as they are used to pay qualified disability expenses.




Here’s how taxpayers can check if their charitable donation is tax deductible


The arrival of the holiday season is when many people think about how they can give back. Often taxpayers want to donate to a charity. The IRS has a tool that can help people figure out if giving to their favorite cause will also give them the gift of a tax deduction.


Tax Exempt Organization Search on allows users to search for tax-exempt charities. Taxpayers can use this tool to determine if donations they make to an organization are tax-deductible charitable contributions.

Here are some key features and functions of the TEOS tool:

  • It provides information about an organization’s federal tax status and filings.
  • Donors can use it to confirm that an organization is tax-exempt and eligible to receive tax-deductible charitable contributions.
  • Users can find out if an organization had its tax-exempt status revoked.
  • Organizations are searchable by legal name or a doing business as name on file with the IRS.
  • The search results are sortable by name, Employee Identification Number, state and country.


Users can also download complete lists of organizations eligible to receive deductible contributions, auto-revoked organizations and e-Postcard filers using links on the Tax Exempt Organization Search page of



Get ready to file taxes: What to do before the tax year ends


There are things taxpayers can do before the end of the year to help them get ready for the 2021 tax filing season. Below are a few of them.


Donate to charity

There is still time to make a 2020 donation. Taxpayers who don't itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying charities. Cash donations include those made by check, credit card or debit card. Before making a donation, people can check the Tax Exempt Organization Search tool on to make sure the organization is eligible for tax-deductible donations.


The Coronavirus Aid, Relief, and Economic Security Act changed this law. The CARES Act also temporarily suspends limits on charitable contributions and temporarily increases limits on contributions of food inventory.

Report any name or address change

Taxpayers who moved should notify the IRS of their new address. They should also notify the Social Security Administration of any name change.


Renew expiring ITINs

Certain Individual Taxpayer Identification Numbers expire at the end of this year. Taxpayers can visit the ITIN page on for more information on which numbers need renewal.


Connect with the IRS

Taxpayers can use social media to get the latest tax and filing tips from the IRS. The IRS shares information on things like tax changes, scam alerts, initiatives, tax products and taxpayer services. These social media tools are available in different languages, including English, Spanish and American Sign Language.


Find information about retirement plans has end-of-year find tax information about retirement plans. This includes resources for individuals about retirement planning, contributions and withdrawals. The CARES Act retirement plan relief waived required minimum distributions during 2020 for IRA or retirement plan accounts. Also, eligible individuals can take a coronavirus-related distribution of up to $100,000 by December 30, 2020 and repay it over three years or pay the tax due over three years.


Contribute salary deferral

Taxpayers can make a salary deferral to a retirement plan. This helps maximize the tax credit available for eligible contributions. Taxpayers should make sure their total salary deferral contributions do not exceed the $19,500 limit for 2020.

Think about tax refunds

Taxpayers should be careful not to expect getting a refund by a certain date. This is especially true for those who plan to use their refund to make major purchases or pay bills. Just as each tax return is unique to the individual, so is each taxpayer's refund. Taxpayers can take steps now to get ready to file their federal tax return in 2021.




Tips to help people stay safe online

These days most people are spending more time at home and a lot more time online. Whether people are online for work, school, a virtual gathering or shopping, online security is more important than ever.


Everyone should be mindful of risks they may encounter when they share devices, shop online and interact on social media.

Taxpayers might find the online security overwhelming, but it doesn't have to be. Even those who aren't super tech-savvy can stay safe online.

Remember security is important.

No one should reveal too much information about themselves. People can keep data secure by only providing what is necessary. This reduces online exposure to scammers and criminals. For example, birthdays, addresses, age and especially Social Security numbers are some things that should not be shared freely. In fact, people should not routinely carry a Social Security card in their wallet or purse.


Use software with firewall and anti-virus protections.

People should make sure security software is always turned on and can automatically update. They should encrypt sensitive files stored on computers. Sensitive files include things like tax records, school transcripts and college applications. They should use strong, unique passwords for each account. They should also be sure all family members have comprehensive anti-virus protection for their devices, particularly on shared devices.


Learn to recognize and avoid scams.

Everyone should be on the lookout for scams. Thieves use phishing emails, threatening phone calls and texts to pose as IRS employees or other legitimate government or law enforcement agencies. People should remember to never click on links or download attachments from unknown or suspicious emails. If someone calls asking for personal information, people should not to give out such details.

  • Protect personal data.
    Adults should advise children and teens and other young users to shop at reputable online retailers. They should treat personal information like cash and shouldn’t leave it lying around.
  • Know the risk of public Wi-Fi.
    Connection to public Wi-Fi is convenient and often free, but it may not be safe. Hackers and cybercriminals can easily steal personal information from these networks. Always use a virtual private network when connecting to public Wi-Fi.




Handle Mutual Funds Carefully at Year End


As we approach the end of 2020, now is a good time to review any mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.


Avoid surprises

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.


For each fund, determine how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.


Buyer beware

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.


In reality, the value of your shares is immediately reduced by the amount of the distribution, so you’ll owe taxes on the gain without actually achieving an economic benefit.


Seller beware, too

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2021 — unless you think you’ll be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.


When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods (known as the specific identification method), thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.


Think beyond taxes

Investment decisions shouldn’t be driven by tax considerations alone. You also need to know your risk tolerance and keep an eye on your overall financial goals. Nonetheless, taxes are still an important factor. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.





Intrafamily Loans and a Family Bank

Among the primary goals of estate planning is to put in writing how you want your wealth distributed to loved ones after your death. But what if you want to use that wealth to help a family member in need while you’re still alive? This has become an increasingly common and pressing issue this year because of the COVID-19 pandemic and changes to the U.S. economy.


One way to help family members hit hard by job loss or increased debt is through an intrafamily loan or even by establishing a full-fledged family bank.


Structure loans carefully

Lending can be a way to provide your family financial assistance without triggering unwanted gift taxes. As long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift.


This means, among other steps, documenting the loan with a promissory note and charging interest at or above the applicable federal rate (which is now historically low). You’ll also need to establish a fixed repayment schedule and ensure that the borrower has a reasonable prospect of repaying the loan.


Even if taxes aren’t a concern, intrafamily loans offer important benefits. For example, they allow you to help your family financially without depleting your wealth or creating a sense of entitlement. Done right, these loans can promote accountability and help cultivate the younger generation’s entrepreneurial capabilities by providing financing to start a business.


Maybe open a bank

Too often, however, people lend money to family members with little planning or regard for potential unintended consequences. Rash lending decisions may lead to misunderstandings, hurt feelings, conflicts among family members and false expectations. That’s where a family bank comes into play.


A family bank is a family-owned and funded entity — such as a dynasty trust, a family limited partnership or a combination of the two — designed for the sole purpose of making intrafamily loans. Often, family banks can offer financing to family members who might have difficulty obtaining a loan from a bank or other traditional funding sources, or lend at more favorable terms.


By “professionalizing” family lending activities, a family bank can preserve the tax-saving power of intrafamily loans while minimizing negative consequences. The key to avoiding family conflicts and resentment is to build a strong governance structure that promotes communication, decision making and transparency.


Establishing guidelines regarding the types of loans the family bank is authorized to make — and allowing all family members to participate in the decision-making process — ensures that family members are treated fairly and avoids false expectations.


Learn more

More than likely, someone in your extended family has faced difficult financial circumstances this year. Contact us to learn more about intrafamily loans.




As stimulus debate rages, senators agree on tax cuts for beer

By Laura Davison


Lawmakers are still divided along partisan lines about how -- or whether -- to proceed with another round of economic stimulus before the year’s end, but one issue has the backing of most Senators: tax cuts for beer, wine and liquor.


A bipartisan group of 57 senators sent a letter to Senate leadership Tuesday asking for a permanent extension of an excise tax cut for brewers, wine makers and distillers in any final legislation before Congress breaks for the year. The bill extending the tax cut, which was initially passed in the 2017 tax overhaul, has 77 sponsors in the Senate and 351 backers in the House.


Without an extension, the levies will increase on Jan. 1, 2021, which could damage an industry that is already struggling, the lawmakers said.


“Producers have already seen dramatic declines in revenue because of the closures of tasting rooms and restaurants, bars and other on-premise establishments and cancellations of major sporting events and concerts,” the letter said.


Passing the alcohol excise tax cut extension likely hinges on whether Congress can reach quick agreement on stimulus legislation that has been stalled since the summer. A $908 billion bipartisan compromise proposal was unveiled Tuesday that would include more money for small-businesses loans, aid for local governments and an extension of unemployment benefits.


That plan has yet to garner support from House and Senate leadership, and lawmakers would need to negotiate to include the extension of the beer-tax cut in the package. Congress also faces a Dec. 11 deadline to pass a government funding bill to avert a federal shutdown.




House approves restrictions on Chinese companies listing in U.S.

By Daniel Flatley and Ben Bain


The House of Representatives approved legislation that could ultimately lead to Chinese companies -- including behemoths like Alibaba Group Holding Ltd. and Baidu Inc. -- getting kicked off American stock exchanges if U.S. regulators aren’t allowed to review their financial audits.


The legislation won bipartisan support in the House after easily clearing the Senate back in May. Passage now sends the bill to President Donald Trump, who is expected to sign it.


While the legislation provides a phase-in period -- penalties only kick in after three straight years of failure to comply -- it represents intensifying scrutiny in Washington of ties with China. Chinese firms for years have relied on access to American capital markets, and more broadly to dollar-based finance, as a key funding component.


“U.S. policy is letting China flout rules that American companies play by, and it’s dangerous,” said Senator John Kennedy, one of the bill’s lead sponsors, in a statement. “Today, the House joined the Senate in rejecting a toxic status quo, and I’m glad to see this bill head to the president’s desk.”


In addition to requiring companies to allow U.S. inspectors to review their financial audits, the measure -- originally introduced by Kennedy, a Louisiana Republican, and Senator Chris Van Hollen, a Maryland Democrat -- requires firms to disclose whether they are under government control.


Many investors “have been cheated out of their money after investing in seemingly legitimate Chinese companies that are not held to the same standards as other publicly listed companies,” Van Hollen said in a statement. “This bill rights that wrong, ensuring that all companies on the U.S. exchanges abide by the same rules.”


The measure represents a watershed moment in a long-running dispute between Washington and Beijing. At issue is China’s refusal to let the Public Company Accounting Oversight Board examine audits of firms whose shares trade in the U.S. The requirement for the inspections by the agency, which was created in the wake of the Enron Corp. accounting scandal, is meant to prevent fraud and wrongdoing that could wipe out shareholders.


Investors have mostly shrugged off the anticipated legislative move. Alibaba, the largest U.S.-listed Chinese company, was steady in after-hours trading, following a 1 percent drop on Wednesday. The offshore yuan was little changed.


Fang Xinghai, the vice chairman of the China Securities Regulatory Commission, last month expressed optimism that the clash could be resolved with an incoming Biden administration. “It’s not an intractable problem,” Fang said, adding that it’s important to ensure that Chinese companies have access to international capital markets.


Regulators in the two countries have been engaged in on-again, off-again negotiations amid the standoff for more than a decade. Over the years there have been moments of optimism that the two sides were closing in on a deal, but ultimately it always fell through -- with China citing strict confidentiality laws. More than 50 other foreign jurisdictions now permit the PCAOB inspections.


Despite the inability of American inspectors to review audits of Chinese firms, they’ve been allowed to continue to trade in the U.S., as the dynamic has been profitable to American stock exchanges, investment banks and asset managers. According to the Securities and Exchange Commission, more than 150 of the country’s companies, with a combined value of $1.2 trillion, traded on U.S. exchanges as of 2019 and there have been a spate of initial public offerings this year.


Major companies such as Vanguard Group Inc., the New York Stock Exchange, and Nasdaq have all expressed concern that the trend could reverse, with a crackdown causing Chinese companies to move their listings to Hong Kong or countries where investor protections are weaker than in the U.S. American investors would still be able to purchase the stock.


Alibaba CFO Maggie Wu said during a May 22 earnings call that the company “will endeavor to comply” with legislation that seeks to bring transparency to investors buying stocks on U.S. exchanges. Her comments were directed specifically at the Kennedy-Van Hollen legislation, which at that point had just passed the Senate.


The bill would prohibit foreign companies from trading in the U.S. if PCAOB inspectors aren’t allowed to review their auditors’ work for three consecutive years. The businesses would also have to disclose whether they’re controlled by China’s Communist Party, or any other foreign government.


Jay Clayton, the outgoing chairman of the Securities and Exchange Commission, said the legislation will help “level the playing field for all issuers” in the U.S. stock market.


“Today’s vote, in combination the commission’s ongoing work, will help address these long-standing issues for the benefit of U.S. investors,” he said in a statement.


The SEC has been pushing ahead with writing a rule to tackle the same issue, which would lead to the de-listing of companies for not complying with U.S. auditing rules, Bloomberg News reported last month. The effort is in response to recommendations released earlier this year by top Trump-appointed financial officials including Clayton and Treasury Secretary Steven Mnuchin.


The NYSE said in a statement that “we are hopeful this legislation’s time horizon will allow” for balancing both protection and choice for investors. Meanwhile, Nasdaq said it “stands ready to work with our listed companies to comply with any and all regulations” and that it looks forward to cooperating with the SEC to bolster transparency.


The bill passed on Wednesday tasks the SEC with writing a rule to implement part of the measure.


As in the Senate, the bill passed the House by voice vote, underscoring the bipartisan support for the measure.

-- With assistance from Billy House.




Gifting and taxes: The sooner the better

By Roger Russell


While festivities may be somewhat dampened this year due to the coronavirus, the holiday season seems to foster a spirit of giving. This year might be a good time to indulge the spirit, according to wealth planners.


“It’s always a good idea to make gifts,” said Lawrence Mandelker, counsel in the tax and wealth planning practice at law firm Venable. “For those that have sufficient means to live on after they make the gift, it’s a good idea to get any appreciation out of their potential estate, and move tax-free dollars to their kids.”


“We’re telling clients that now is a very good time to gift,” he said.


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,” Mandelker said. “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. “Some of the proposals suggest $3.5 million per person,” Mandelker said. “Currently, a husband and wife can transfer $23 million free of federal estate taxes. If exemptions decrease, that number will go down. If it goes to $3.5 million, a husband and wife would be limited to $7 million between them, so that’s a swing of $16 million. At a 40 percent tax rate, that’s a significant amount.”


The $11.5 million exemption is set to sunset in January 2026. “Of course, we knew that the $11.5 million amount would not last forever,” he said. “We’ve been telling clients for years to consider making gifts. We didn’t know exactly where the exemption would fall, but we thought it would go to roughly half of what it is now.”


There is a risk in waiting too long to make a gift, Mandelker noted. “If legislation is passed, we don’t know when it will be effective,” he said. “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.”




IRS saw major jump in individual returns in 2020

By Jeff Stimpson


The Internal Revenue Service estimates that an additional 6.5 million individual tax returns were filed for 2020, a major increase it attributes to large numbers of taxpayers filing returns to be able to claim coronavirus-related stimulus payments.


The projections were recently released in Publications 6186 and 6187, which also predict that four-fifths of all tax returns will be electronically filed by 2027, and that more than 90 percent of individual returns will be e-filed in 2020.


These publications present the number of returns to be filled with the IRS for 2020 through 2027, with projections by different individual, business and exempt return types, filing media (paper versus electronic) and IRS processing campus locations.

  • In calendar 2019, the share of total returns (individual and business) e-filed was 72.6 percent. This percentage is projected to rise to 75 percent in calendar 2020 and steadily increase to 81.3 percent by 2027.
  • Individual income tax returns make up over half of the grand total of return filings in any given year. For 2020, the projected share of the individual income tax returns that will be e-filed is 90.6 percent; current forecasts project that this ratio will reach 93.8 percent by 2027.
  • The CARES Act and recovery rebates led an influx of 3.2 million additional filers due to the rebate. Estimates are that most of these additional filers will file again in 2021 for many reasons, including a chance that there might be further refundable credits. All the additional filers are estimated to drop off in 2022.
  • The Taxpayer First Act made e-filing more widespread for business taxpayers. Taxpayer First also lowers the threshold for corporations and partnerships to e-file starting in 2021. In that year, the act will make e-filing mandatory for exempt and political organizations, with a temporary waiver for small business filers.


The publications also include the return projections by examination classes, paper return projections for the new 1040-SR and 1040-SP, and U.S. return projections of the new e-filing option for the 1040-X.




Preparing CPAs to Discuss the National Debt

BY MICPA | DEC 1, 2020


As our country works its way through this current crisis, history may repeat itself, and CPAs and their clients will likely hear much talk about the national debt. You may recall this occurred in the post 07/08 financial crisis years after trillions of dollars were borrowed to keep the economy moving. Today there are discussions of an additional trillion-dollar-plus stimulus package and warnings about the current and increasing national debt size. There are various  economic theories and political posturing regarding the need for large-scale borrowings and the significance of the national debt’s size and trajectory. Volumes have been written on the national debt. The following is a brief overview of the range of theories and positions CPAs and their clients might expect to hear.


On the far-right side of the spectrum is the January 2019 “H.J.Res.6 - Proposing a Balanced Budget Amendment to the Constitution of the United States” and the eight related, subsequent bills introduced through August 2020 in the House and Senate to curtail annual deficit spending. In essence, the bill requires the president to submit a balance budget each year; it prohibits total spending from exceeding total receipts, excluding the repayment of debt and receipts from borrowings; and it prohibits total annual spending from exceeding 20 percent of GDP. These provisions can be overwritten by a proposed greater than simple majority. It also requires a greater than the current simple majority to increase the national debt limit, and it gives Congress the ability to waive the requirements when a declaration of war is made, or a military conflict causes a serious imminent threat to national security. The bills have only a few sponsors, and they appear to have little traction.


On the far-left side of the spectrum is the modern monetary theory, a reemerging heterodox macroeconomic theory being advanced by a few economists. The theory generally states that, if a sovereign nation prints its currency (like the US), it can and should spend as much as it wants because it can print its own money. Risks to the theory are the known, unknown and unintended consequences. A known risk, which its followers acknowledge, is run-a-way inflation, but they offer a control mechanism through congressional action. They assume that as inflation heats up, Congress can and will work together by timeously and successfully implementing a safety valve (i.e., taxing money out of the economy). Many economists and others consider this untested theory in an economy as large, diverse, and globally significant as the US’s, the current political incentives and party divide, and they question the practicality of this as an effective safety valve, while they weigh the greater risks to the country and global economy of it not working as the theory suggests. 


In between are economists and others saying, among other things, 1) the debt is a threat to our economic and/or national security, 2) the debt is a problem but not a “today problem,” 3) the debt is a today problem, but we can’t focus on it today, 4) the trajectory of the debt is unsustainable, (which frequently appears in the audited 2019 Financial Report of the United States Government issued in February 2020 and prior years’ reports), and 5) the president’s 2021 budget submission to Congress A Budget For America’s Future, submitted in February 2020, stated: “If America’s spending and debt crisis are not addressed and lower economic growth continues, American families will see a much lower standard of living.” This budget submission was before COVID-19 was acknowledged as a full-blown national and global crisis. Since then, the GDP has declined by more than one-half trillion dollars, the speed and size of its future growth is even more questionable, and the national debt has increased by almost four trillion dollars and continues to rapidly move upward.


It is impossible to know now who, if any of them, are correct.  What we do know is the national debt of over $27 trillion is larger and growing faster than our $20 trillion GDP, and it is projected to continue to do so for the foreseeable future. Furthermore, Federal Reserve Chairman Powell recently commented that more stimulus is likely needed to help with the recovery, and now is not the right time to worry about the US’s fiscal health. Instead, that should be addressed when unemployment is low again and tax revenues are rolling in. He added that we are not going back to the old economy. Chairman Powell did not tell us when or how unemployment will become low again or when tax revenue will be rolling in more than expenditures—that remains to be seen.


One thing CPAs and their clients know is that trees do not grow to the sky. Likely, neither will the national debt!




PPP Forgiveness: Apply Now Or Wait?



The Paycheck Protection Program (PPP) was a huge component of the CARES stimulus package aimed at helping smaller businesses and non-profits stay afloat in the beginning of the pandemic. The program was fraught with administrative changes and nuances, but nonetheless 5.2 million loans were granted for a total of about $525 Billion dollars. The PPP was intended to provide support for payroll and the SBA reported that the PPP positively impacted 51 million jobs. A big question is: When do I apply for forgiveness? Now, like my bank wants me to, or later?


The most immediate issue facing you as a PPP borrower, is assuring your loan is forgivable. For most applicants, their PPP loan was calculated using 2½ months of their 2019 payroll or self-employment income. Originally, PPP loan proceeds had to be spent within 8 weeks of receiving the loan. That period was extended to 24 weeks. If you received a PPP loan for $350,000 in March, had forgivable expenses of the same amount within the 24-week period, and met the other rules (there are always “other rules”), the entire loan is forgiven. Forgivable expenses are payroll (with pay caps on owners, highly compensated staff and certain fringe benefits) plus rent, utilities and mortgage interest.


The forgiven amount is tax-free. However, the IRS has ruled that the expenses paid with forgiven PPP loan proceeds are not deductible. So, if your company got a $350,000 PPP loan and used it to cover part of your payroll, $350,000 of your 2020 payroll expense would not be deductible. The IRS just ruled that PPP funded expenses are not deductible no matter when your PPP loan is forgiven (now or in 2021). There is a possibility that pending legislation would allow PPP-paid expenses to be deductible while keeping the forgiveness as tax-free; however, that’s only a possibility and it’s generally not prudent to base your tax planning on “possibilities.”


You must apply for forgiveness within 10 months after the end of the ‘Covered Period.’ which is the 24-week period that starts when you received your PPP loan. The lender (i.e. your bank) has 2 months to process your loan forgiveness application then SBA has three additional months to approve your forgiveness. Here are some additional nuances you need to be aware of:


‘Quickie’ Forgiveness Form (3508S). If your PPP loan was $50,000 or less and you used all of the funds for payroll and other forgivable expenses, you can use a form 3508S. It’s a one-page form where you affirm that you used the loan for qualified expenses. You don’t submit any expense documentation with the application but agree to keep all of your documentation for 6 years. It doesn’t get much easier than this. Don’t qualify to use the 3508S? There is a “Plan B” that might simplify your forgiveness process.


EZ Form (3508EZ). As the name suggests, form 3508EZ is rather ‘easy’ to file. (Of course, your idea of ‘easy’ may not coincide with the perceptions of the IRS and SBA.) If you can satisfy at least one of the following three requirements, use form 3508EZ. This form eliminates the need to submit your employee headcount and payroll reduction documentation; however, you will need to document that you spent your PPP funds for qualified payroll and non-payroll (e.g. rent, utilities, mortgage interest) expenses.


  1. You are self-employed and have no employees
  2. You did not reduce the salaries or wages of your employees by more than 25 percent and did not reduce the number or hours of your employees from January 1st through the end of your Covered Period. (Remember, your “Covered Period” is the 24-week period from the date you received your PPP loan proceeds.), or,
  3. You experienced reduced headcount as a result of complying with CDC, HHS or OSHA health directives related to COVID-19 and did not reduce the salaries or wages of your employees by more than 25 percent.


The Main Forgiveness Application. If you don’t fit the mold of the 3508S (loan $50,000 or under) or the 3508EZ, you must file form 3508 and supply the headcount calculations and documentation that your funds were spent on qualified payroll and non-payroll expenses. If you chose to use a 24-week Covered Period, your qualified payroll cost will probably exceed your loan amount, so you’ll only need to submit payroll records - greatly simplifying the documentation process.


Over $2 million? Prove It: At the outset, certain large PPP loans generated controversy regarding their necessity. To address this valid concern, the Treasury announced all loans over $2 million will be subject to full audits. In early November, the SBA published a ‘necessity questionnaire.’ The questionnaire is rigorous in determining the necessity of a PPP loan. If a borrower fails this test, its loan will not be forgiven. There are two versions of the questionnaire, one for for-profit entities and another for nonprofit organizations.


When to apply, now or later? Now we get to the big question: When should you apply for forgiveness? There are two schools of thought: apply now while we know the rules and before things could change for the worse; or delay application until after the year-end and see what might come out in subsequent leadership or stimulus bills. To get a handle on this, I did an informal poll of CPA firms in Michigan (I’m a task force leader at the Michigan Association of CPAs). My poll asked if they were advising their clients to apply now or wait. I solicited input from professionals working in a wide range of firms, from the largest in the state to sole practitioners. I also asked for commentary. Here are the results:


  • Under $50,000 (for-profit and nonprofit) with no staff or payroll reductions - apply now (pretty much unanimous by comment)
  • Self-employed with no employees - apply now
  • For-profit entities that must file form 3508 - 85% of respondents said ‘wait’ and 15% said ‘apply now’
  • Commentary on loans over $2 million was to carefully review the questionnaire and maybe even consider repayment


I’ll throw in my 2 cents; I’d vote to wait. You have 10 months from the end of your Covered Period, which gives most of us until sometime in August of 2021 to apply. By then, we may have another stimulus bill that may allow for the deductibility of PPP-funded expenses (the possible HEROES act). In addition, they (Congress) may increase the automatic forgiveness amount to $150,000 (chatter from DC).


Bottom line: If you are a nonprofit with a PPP loan under $2 million and have enough evidence of forgiveness, apply now. If you have a PPP under $50,000, and used it for payroll, apply now.

If you are self-employed and have no employees and got the PPP, apply now. For the rest of the PPP recipients, most CPAs I surveyed think waiting is better than rushing.



Senate runoffs complicate year-end tax planning

By Michael Cohn


The outcomes of two runoff elections in Georgia that are scheduled for Jan. 5 will determine the balance of power in the U.S. Senate, and may also have an impact on the kind of tax planning that accountants should be advising their clients to do.


President-elect Joe Biden’s ability to pass his tax proposals into law will depend on whether Democrats control the Senate, given the party's shrinking margin of control in the House. If Democratic challengers Jon Ossoff and Raphael Warnock manage to beat Republican incumbents David Perdue and Kelly Loeffler in January, the Senate would be evenly split next year, with Vice president-elect Kamala Harris able to cast the deciding vote to break any ties over possible tax legislation if the Democrats used a budget reconciliation maneuver to overcome a Republican filibuster.


“There’s a little bit of frustration because there’s still a level of uncertainty,” said Jim Guarino, a managing director at Top 100 Firm Baker Newman Noyes. “The reason why I say that, not so much with regard to President-elect Biden, but because of the fact that we still are unsettled at the Senate level and we’re really not going to have an answer until the first week of January. What’s a little troublesome is if we knew for sure whether or not there was going to be traction with regard to President-elect Biden’s proposals.”


The majority of his proposals would likely find their way into Democrats’ tax legislation, but the prospects of passing any tax legislation will depend on whether Democrats can push them through the Senate and a narrowly divided House. That puts accountants into a bind when it comes to predicting tax strategies.


“I think we would be much more certain and confident with regard to our actions, but the reality is if the Republicans continue to retain control over the Senate as a result of the Georgia runoff in January, many of his proposals may not get through,” said Guarino. “That’s not to say that everything will be squashed, but maybe a significant amount of them may not make their way through, and some of the planning steps that we’ve taken in December may not have been necessary. The problem with that scenario is we’re not going to know until Jan. 5 or Jan. 6, and the clock strikes midnight on Dec. 31.”


Jonah Gruda, a partner and leader of the private client services group at Top 100 Firm Mazars USA, believes clients should try to take advantage of the low tax rates in the meantime, assuming they might go up for high-income taxpayers under a Biden administration.


“Some of the things we’ve been seeing from the Democrats is lifting the capital gains rates to as high as the maximum ordinary rate for taxpayers making over a million dollars,” he said. “That almost doubles the current rate, from 20 percent to 37 percent. Another proposal would bring that up to 39.6 percent. I think that’s where we’re probably headed is the highest marginal rate would be 39.6 percent and the capital gains rates would be tied to that.”


The Supreme Court’s decision on the latest case challenging the constitutionality of the Affordable Care Act could add another wrinkle to tax planning for next year.


“Depending on what happens in the Supreme Court with the ACA, what everyone knows as the Obamacare tax, the net investment income tax, that would potentially add a 3.8 percent surcharge, which means, if this all goes through ... that means capital gains and qualified dividends could be as high as 43.4 percent, which would mean your tax rate on capital gains and qualified dividends would potentially be more than your effective rate on your wages,” said Gruda. “So what does that mean for planning purposes?”


Some clients may want to sell some of their securities and assets this year instead of waiting until a future year in case they're worried about tax rates, especially for capital gains taxes, going up in a Biden administration.


“One of the things I talk to clients about is how long are they planning to hold the asset? What do you think the future appreciation is going to be? If we think they want to sell things and generate liquidity in 2021 and have some flexibility, maybe it makes sense to sell that before the end of the year to lock in the lower rates,” said Gruda. “On the other hand, if you’re bullish on a particular asset, maybe selling prematurely is not really the best course of action because you lose the ability for that appreciation to get captured. It really just depends on what the individual goals are for the taxpayers. If you’re planning on entering a transaction in the new year, you may just want to preempt it now because we know the rates are lower.”


Guarino and his colleagues have been fielding calls from clients asking about capital gains rates going up, even though most taxpayers aren’t in danger of seeing those rise under a Biden administration.


“The irony to all of this, as my colleague admitted, is that these folks weren’t anywhere near the $1 million taxable income threshold, and yet a little information is dangerous,” said Guarino. “I guess all they heard was that capital gains rates could go from currently a high of 20 percent to as much as 39.6 percent and they were ready to jump off the cliff and start selling out positions between now and the end of the year. My colleague said, ‘Hey, listen, I’m not going to tell you what to do from an investment standpoint, but if all you’re doing this for is driven by a tax motivation only, then I’d really caution you to put the brakes on and think this through, because unless there’s something happening in your world that I’m not aware of, the last time I checked you were nowhere near the taxable income threshold that President-elect Biden has proposed.’”


Like Gruda, he has been advising clients to accelerate some of their transactions for this year, just in case the tax rates do go up. “One of the things that we're really advocating is being aware of and taking advantage of whatever current tax bracket that you’re in,” said Guarino. “Right now there are seven tax brackets, but there’s a couple of important inflection points within those tax brackets. Essentially the tax brackets go from 10 to 12 percent, and there’s this big spike from 12 percent to 22 percent, and from there we’ve got a 22 to 24 percent bracket. Then there’s another spike that jumps to 32 percent.”


For those who are on the verge of entering another tax bracket, he is advising them to claim any potential additional income from stock options and bonuses this year, rather than next year.


“Not all of us have that great of a control over our compensation,” Guarino added. “If there are potential bonuses that we can pick up this year, we’re going to flip that switch. But the two areas that I’m finding give us the most flexibility is with regard to stock option planning, whether it’s nonqualified stock options or some other deferred compensation that we can position ourselves to receive this year.”


Gruda has also been advising his clients to accelerate some of their income. “If you know the Biden plan is going to come into effect in the New Year, maybe you’ll accelerate income in 2020 and defer expenses until 2021, which is counterintuitive to what the traditional planning used to be,” he said. “It used to be to defer income and accelerate expenses. Now if I know my income is going to be taxed at higher rates, let me accrue that income and accelerate income into a tax bracket where I know the rate is going to be lower and defer expenses until future years when I know those expenses are going to be worth more in terms of tax savings.”


High regard for Roths

Roth individual retirement accounts can help with tax planning. “Really the creme de la creme is taking advantage of a Roth conversion,” said Guarino. “That really does a couple of good things. It allows us to fill up that 24 percent tax bucket, and maybe more importantly it takes some deferred retirement plan income that we otherwise would have to recognize somewhere down the road in the future and allows us to report that income this year. We’re making a bet. We’re looking into the crystal ball and saying we’re in a really low tax bracket this year, albeit a 24 percent tax bracket. Our gut feeling is that somewhere in the future, when we start taking our distributions from these retirement plans, we’re probably going to be in a higher tax bracket, so we’re going to leverage the lower rates this year and hopefully the time value of money doesn’t work against us.”


Gruda has also been advising clients to do Roth IRA conversions. “A lot of us do have 401(k)s or IRAs,” he said. “One of the things we might want to consider now is if you do think taxes are going to change, maybe not this year, maybe not next year, maybe you will consider rolling over your 401(k) into a Roth because let’s take in the lower tax bracket now, as opposed to waiting until later on to take that money out at higher rates. Maybe you want to start investing in those Roth products now rather than invest in your 401(k)s and your traditional IRAs now. A lot of tax policy and politics relates to what your philosophical outlook on life is. ... But those are some things you can do now.”


Many taxpayers this year won’t have the ability to take advantage of these strategies, especially if they have lost their jobs or businesses or worry they might lose them in the months ahead. For those who have been collecting unemployment benefits, accountants should make them aware that those benefits are taxable.


"Folks don't realize that it’s taxable, so come the end of the year they’re going to receive a statement that reports the amount of unemployment compensation benefits that that they’ve received," said Guarino. "Unfortunately they may not have had any taxes paid in, so those folks who may not be in the high-income taxpayer bracket are going to have tax reporting issues. We’ve tried to alert them through blogs and emails. But I think that’s one of the bigger concerns is that they could be exposed to potential tax penalties because they just haven’t paid enough taxes in, or more importantly when they go to file their tax return in April and their advisor says you owe $2,500, they’re not going to have the funds to pay those taxes.”


For those with extra money to set aside, he advises them to consider using some of it for charitable giving vehicles such as donor-advised funds. “It’s kind of a one-two punch,” said Guarino. “On one hand, we’re picking up additional income from the Roth conversion and then we’re utilizing a very substantial charitable contribution to help offset that income for this year.”

Estate taxes could also be a concern for some clients. The estate tax exemption in the Tax Cuts and Jobs Act of 2017 means only a few estates would be facing those taxes -- those with estates of over $11.18 million for single taxpayers and over $22.36 million for married couples, indexed for inflation. But there may be some complications for other taxpayers if the law changes under the new administration.


“We have this issue with step up in basis,” said Gruda. “Under current law, if you or I should pass away, any assets that we hold within our estate get stepped up to the current fair value at death, so if you hold IBM stock or a piece of property and it’s worth a million dollars when you die, the new basis of that asset is a million dollars. However, one of the proposals is that step up is eliminated, which is a big deal because if you get a step up in basis and you sell an asset to generate liquidity that you inherit, you wouldn’t have any gain on that. But now potentially you would if that step up in basis goes away.”


He has been talking with some of his clients about estate planning and trusts. “It depends on whether you want to try to keep that wealth in the family, or you want it to go to charity, or you’re fine with some of that wealth going back to the government in the form of taxes,” said Gruda. “It just depends on what your worldview is. We’re talking about what the potential options are, whether you should set up trusts now with the remaining exemptions that the Tax Cuts and Jobs Act afforded us, what assets would be key assets in an estate planning scenario, and what should happen if you wait and those exemptions get brought down to earlier years when it was $3.5 million. What does that do with your taxable estate now?”


The priority for Congress in the months ahead probably won’t be tax legislation as much as COVID-19 relief for the people and businesses struggling to cope with the pandemic, as well as aid for state and local governments and health care providers. That may be something that enough Republicans and Democrats can agree on, whatever the outcome of the runoff elections in January turn out to be. In the meantime, there are some steps that taxpayers can take before the end of the year.


“One of the things that I’ve been sharing with my clients recently is that time is of the essence,” said Guarino. “Our job as advisors is to bestow on our clients enough education and knowledge to give them an opportunity to make an educated decision. We’re not going to tell them what to do. We’re going to give them the tools and knowledge that they need to make an educated decision. The one thing we always say to them is you never want to be in a situation where all that you’re stating is ‘woulda, coulda and shoulda.’ You don’t want to be in that position. It’s one thing to be wrong, but at least be wrong because you were given information and you just made a bad choice.”


He believes it’s important for clients to make some decisions before the end of the year. “For some of the things that they may want to do, they can’t wait until Dec. 31,” said Guarino. “If it’s contributing to a donor-advised fund, if they’re trying to make a substantial charitable donation, some of the administrators are closing their doors midway through December, so if they haven’t already started to think about what they want to make in the form of a charitable donation to a donor-advised fund, they’d better make that decision pretty soon. ... The same holds true if they’re doing a Roth conversion. They're going to have to talk to their investment folks to get that ball rolling and not wait until the bitter end.”




Can the economic recovery continue?

Yes, but rising COVID cases may slow the comeback. Continued fiscal stimulus is key.



Key takeaways

  • The economy continues to recover but momentum has slowed recently as COVID cases increase.
  • Fiscal stimulus from earlier this year has mostly run out and the recovery may be fragile in the near term until fiscal support picks up.
  • The global recovery may be uneven but continued support from governments should help it persist.
  • Volatility in the stock market may crop up due to the uncertain path of the virus and swings in expectations around fiscal stimulus.


United States

  • The US is in the early-cycle recovery phase, as economic activity continues to bounce back after historic declines in Q2.
  • The virus has driven a shift from consumer spending on travel and other services toward the purchase of goods, and the housing market has benefited from low interest rates and increased demand.
  • High-frequency data—including measures of employment conditions—indicates that progress has lost some momentum. Accelerating virus cases and reimposed distancing measures in some states will likely weigh on activity in the near term.
  • Fiscal policy has become less supportive as early-year emergency stimulus funds have largely run out. Some additional stimulus appears likely in the coming months regardless of the final election outcomes.
  • The near-term early-cycle recovery may be somewhat more fragile than usual due to elevated COVID cases and a fiscal lull, but the outlook remains one of continued expected progress underpinned by rising consumer confidence, easy monetary policy, better corporate expectations, and hopes for further reopening over the coming quarters.



  • Global activity continues to improve, led by a synchronized recovery in manufacturing, whereas service industry activity has been slower to recover.
  • China’s recovery is the most advanced, bolstered by a broad-based industrial rebound, but the pace of improvement may moderate as the recovery matures.
  • In Europe, the acceleration in COVID-19 cases will likely slow the recovery. The near-term outlook is less favorable than in the US or China due to Europe’s greater willingness to impose virus-related restrictions without offsetting fiscal support.
  • The path to normalcy for the global economy likely will remain uneven, but continued policy accommodation and a strong industrial rally in China should provide momentum for further cyclical improvement.


Asset allocation outlook

  • The early-cycle backdrop is more constructive for riskier assets such as small cap and more economically sensitive stocks that tend to do well as activity improves.
  • Policy actions are playing a larger role in driving financial market performance than in past cycles.
  • Swings in expectations for more fiscal stimulus and the trajectory of the virus—amid elevated asset valuations—will continue to create the potential for outsized bouts of volatility.
  • Portfolio diversification remains as important as ever, with the valuations of non-US and value equities, and inflation-resistant assets appearing relatively favorable.


The business cycle, which is the pattern of cyclical fluctuations in an economy over a few years, can influence asset returns over an intermediate-term horizon. Cyclical allocation tilts are only one investment tool, and any adjustments should be considered within the context of long-term portfolio construction principles and strategic asset allocation positioning.

The US is in the early cycle recovery phase, along with Eurozone countries, Australia, the UK, and Canada. China is slightly further along in the recovery.


The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. Source: Fidelity Investments (Asset Allocation Research Team), as of October 31, 2020.




Financial lessons learned from the pandemic

Despite coping with COVID, Americans can see some silver linings ahead.



Key takeaways

  • Despite the hardships caused by the current pandemic, Americans are expressing confidence in their abilities to take on the challenges ahead.
  • Social connections offer psychological benefits that can help counteract stress and anxiety. Taking the opportunity to reconnect with loved ones in a positive way can be a silver lining in the COVID-19 era.
  • Working with a professional to create a plan can help provide greater wellbeing for people who seek to safeguard their financial security.


Although the dark clouds of the COVID-19 pandemic are still overhead—massive layoffs, nasal testing, concealing face masks, and closed restaurants to name a few—there are silver linings on the horizon and many Americans have learned important lessons that will have a positive impact on their lives, money, and families.


According to Fidelity's Moving Forward study,1 despite an unprecedented level of uncertainty, stress, and anxiety, Americans are expressing confidence in their abilities to take on the challenges ahead. Perhaps as a result, 58% of those adults surveyed claim to have experienced a recent "life event" and say they are preparing differently financially for the new year.


“The events of 2020 are unlike any other, and they are especially stressful since our way of living and working continues to evolve,” said Stacey Watson, senior vice president with oversight for Life Event Planning at Fidelity Investments. “Even with these challenges, it’s encouraging that many families have discovered this experience has brought them closer together, taught them not to take anything for granted, and above all, made them realize they possess strength and resiliency they never knew they had.”


Compounding the stress of day-to-day life during these tumultuous months has been a steady stream of life-changing events. More than two-thirds of respondents report experiencing some sort of major life event—most commonly, job loss (24%), the loss of a loved one (18%), caregiving responsibilities (14%) or making a major purchase (13%). The study also found a number of key financial stressors during the pandemic have actually increased since April 2020,2 even though the market was far more volatile at that time.


Look to find the silver lining as you deal with ongoing uncertainty


Even in troubling times, there are some encouraging findings. A large majority (80%) of respondents feel the pandemic has taught them they can handle more than they realized. In addition, 77% say the experience has put life’s challenges into a different perspective; two-thirds indicate the experience has renewed and strengthened connections with friends and family. And, when thinking about challenging events, many discovered something unexpectedly good came out of the experience.


"Thinking about others actually has several benefits in times of crisis," says Andy Reed, PhD, Fidelity's behavioral economics research lead and psychologist. "First, we tend to be less biased when making decisions on behalf of other people or taking others' perspectives. Second, social connections offer psychological benefits that can help counteract stress and anxiety. Taking the opportunity to reconnect with loved ones in a positive way can be a huge silver lining to the current crisis."


He adds, "Although uncertainty comes in many shapes and sizes, it's important to remember to think outside of ourselves. That way, it's a little easier to understand when we are fearful for others vs. being fearful for ourselves."


Planning and support from a professional


Sometimes people need coaching and support, or someone just to listen to when they feel stuck or feel they are being asked to deal with a lot of uncertainty. That's where financial professionals like Alicia Barnhart, vice president and wealth planner working with Fidelity clients in the greater Detroit area, can play a role. "Michigan has been hit hard by COVID-19 and we're going the extra mile to support our clients. We are doing Zoom video calls every day to help clients create detailed plans that can help provide greater wellbeing as they look to safeguard their financial security."


"A client from Novi, Michigan in his late 60s was in the hospital for 10 days over the summer. Thankfully, his medical condition did not require a respirator and he has since fully recovered from COVID-19," says Barnhart. "He and his wife both told me that during the most stressful, scariest time of their life, the one thing they didn’t need to worry about was their retirement and their investments. They said that thanks to all of our planning, they thought they could make it through anything. It was a big relief for them to be able to focus their energies on getting healthy and staying safe."


3 tips from Fidelity Life Events to help you handle the unexpected


Fidelity’s research uncovered best practices for handling mounting pressure:

  1. To prepare for the future, spend some time learning from the past. Those who learned a new skill, found strength they didn’t know they had, or built resilience as a result of the pandemic are more likely to be planning differently for 2021 (64% vs. 54% who didn’t).
  2. Take an active approach to problem solving, bit by bit. 42% of respondents say they tackle obstacles by breaking challenges down into pieces and solving them one at a time, while 32% wait until they have an action plan fully developed before facing the challenge. The delay can be costly: People who did so also worry more, suffer from greater stress, and were less likely to have learned anything from the experience.
  3. Don’t be afraid to get by with a little help from others, in good times or bad. This isn’t easy, as many survey respondents indicated they receive the greatest support during joyous rather than challenging events. However, that may be because people tend to make others aware of the positive moments in life, while holding back on sharing the negative.



Lastly, the study found that the majority of Americans are staying positive and say they will roll with the changes and create new holiday traditions—and may even enjoy the holidays more because they’ll be simpler.


"There are many resources that we can tap to help us through the stressful times in our lives—from our individual traits like personality and coping skills to external support systems like community and faith organizations," says Reed. "But it's important to remember and appreciate the fact that one of the most profound sources of resiliency is our close relationships—the people who matter most help us get through tough times and come out stronger on the other side."




A more mobile workforce generates tax policy issues

By Roger Russell


The general disruption in life caused by COVID-19 has accelerated the pace of the mobilization of the workforce, creating tax policy considerations that have been slowly surfacing over the past decade.


“The fact that states, employers and workers were all suddenly forced into remote work settings has provided an unexpected opportunity for a discussion about how best to tax an increasingly mobile workforce,” said Joyce Beebe, fellow in public finance at Rice University’s Baker Institute for Public Policy.


“State tax and regulatory issues, home office reimbursement for employees and workplace benefits are starting points to engage in tax policy dialogues for tomorrow’s workforce and the future of work,” she said. “For employees, state rules generally set out the principle that employee wages are attributable to the state where the employee performs his or her work, which means an employee’s physical location dictates where the state personal income tax is due. For many employees, the physical location of where they work, their employer’s place of business, and their residence are in the same state. However, for workers who telecommute, two or three of these locations may not align.”


Traditionally, affected workers are the ones who live close to state lines and commute to a different state to work, she indicated. “As a solution, about 16 states and Washington, D.C., have reciprocity agreements with neighboring states that allow these workers to file and pay taxes in their state of residence, which provides certainty to taxpayers and avoids double taxation,” she said. “And for employees temporarily displaced by the pandemic and working from another state, slightly over a dozen states and Washington, D.C., issued guidance confirming that the remote workers will not be considered in-state workers.”


For employers, having employees working in another state may create physical presence nexus, Beebe observed. “Having nexus in a certain state could lead to several state taxes on the employer, including income, sales and use, or gross receipts taxes. There could also be city, county or municipal-level taxes. The issues can become complicated for employers very quickly.”


When a multistate business determines the amount of taxable income attributable to a particular state, an apportionment formula is used to determine the proper share of the company’s income derived from that state. “Most states either use a three-factor formula based on the company’s sales, payroll and property in the state, or a single-factor formula of sales to determine the amount of taxable income that belongs to the state,” she said. “A lack of remote worker relief at the state level could mean that, when an employee is physically present in a state where the company does not typically have nexus, the state can assert that the wages paid to the employee contribute to the payroll factor of the formula.”


In addition, the remote workers may possess inventory or company-provided equipment, including computers, at the employees’ physical location, she noted: “Some observers believe this could add to the employers’ computation of property in the apportionment formula.”


And finally, under market-based sourcing, most states source the revenue from the provision of services to a state where the services are delivered or received, according to Beebe.

“But some states require service revenue or revenue from licensing of intangibles to be sourced to the state where the income-producing activity occurred, based on the relevant costs of performance,” she said. “These states can claim that the compensation paid to employees who are telecommuting from their states contributes to the generation of revenue, therefore requiring some of the revenue to be sourced to those jurisdictions.”


Industry experts advocate nexus tracing, which allows them to track where their employees are working. “This avoids tax filing or payment surprises for employers during tax-filing season, and also allows employers to accurately fulfill tax withholding obligations,” she said.


Federal attempts at a solution were unsuccessful in 2016 and 2019, Beebe observed. “As a result of the pandemic, the Remote and Mobile Worker Relief Act of 2020 proposed to tax workers either in their state of residence or in the state where they are physically present,” she said. “Businesses favor this proposal because of the compliance challenges generated by states’ sporadic and inconsistent actions. However, observers believe the bill has a slim chance of becoming law, because states don’t welcome a federal preemption of state tax issues.”


“In the absence of a federal solution, states that have not issued guidance for 2020 should clarify that the presence of remote workers during the pandemic is insufficient to create nexus,” she concluded.




‘Stealth Tax Hike’ in 2021, but Individual and Business Tax Increases Loom

By Garrett Watson

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As taxpayers and policymakers consider the prospects for federal tax policy in 2021, it is important to also consider how existing tax law may change in 2021 and over the next five years. While there are many tax changes built into the tax code over the coming years for individuals and businesses, the recent claim that lower- and middle-income Americans may see a “stealth tax increase” in 2021 due to the Tax Cuts and Jobs Act (TCJA) is untrue.


In discussing upcoming tax changes due to the TCJA, economist Joseph Stiglitz argues that “people with incomes between $10,000 and $30,000—nearly one-quarter of Americans—are among those scheduled to pay a higher average tax rate in 2021 than in years before the tax ‘cut’ was passed.” Stiglitz points to estimates by the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT), which suggest that those earning between $20,000 and $30,000 could owe an extra $365 in 2021.


Noting the 2021 JCT estimates, however, requires important context about what this change in tax liability is showing. The TCJA reduced the Affordable Care Act’s (ACA) individual mandate to $0, thus reducing the incentive to purchase qualified insurance and receive related premium tax credits, particularly for lower-income individuals. The reduction in premium tax credits appears as a tax increase for low-income individuals in the JCT distribution tables.


While it is important to consider the impact of the TCJA on premium tax credits and health insurance take-up, it is misleading to call this effect a “stealth tax increase.” The decline in premium tax credits has nothing to do with a change in tax rates or the generosity of the credits as established under the ACA, but rather due to voluntary decisions individuals make about whether to purchase qualified health insurance.


When excluding the functional repeal of the individual mandate, individuals across the income spectrum experience higher after-tax incomes due to the TCJA when compared to previous law. For example, the Tax Foundation originally estimated that in 2021, those in the 20th to 40th percentiles would see a 1.5 percent increase in after-tax incomes on a conventional basis, while the bottom 20 percent would receive about a 1 percent boost in after-tax incomes.


Although there will not be a tax increase for individuals in 2021, there are tax increases scheduled over the next six years. The TCJA’s individual income tax provisions are scheduled to expire at the end of 2025, along with the phaseout of several business tax provisions between 2021 and 2026. The individual provisions set to expire include lower individual income tax rates, the more generous Child Tax Credit (CTC), and the eliminated personal exemption. Businesses will face separate tax increases as R&D expenses must be amortized over five years beginning in 2022, while the TCJA’s full expensing provisions start phasing out at 20 percent per year beginning in 2023.


Absent action by Congress, individuals will face a higher tax burden in 2026, making it important for policymakers to consider how they want to move forward with the individual provisions and, more urgently, business tax changes that improved incentives to invest in the U.S. It is equally important to clear up misconceptions about those upcoming tax increases. Ideally, 2021 will be a year of recovery for public health and the economy, and taxpayers do not need to worry about an automatic “stealth” tax increase.




IRS plans a 50% ramp-up in small-biz audits next year

By Laura Davison


The Internal Revenue Service is planning to ramp up audits of smaller businesses and their investors by about 50 percent next year, following years of persistently low examination rates, an agency official said Tuesday.


The result could be a surge in audits of companies ranging from mom-and-pop retail stores and technology startups to investment funds that have historically faced only infrequent checks thanks to the time and effort required at the IRS.


“The IRS is focusing our efforts to increase compliance activity in this area of not only partnerships, but also investor returns related to pass-throughs,” De Lon Harris, the IRS deputy commissioner of examination for small businesses, said at an American Institute of Certified Public Accountants event. For 2021 “we are planning for 50 percent more than we had in the previous year.”


Pass-through entities, which include partnerships, limited-liability companies and sole-proprietorships, are incredibly difficult for the IRS to audit because they frequently have complex structures that can involve dozens of inter-related entities. Pass-throughs don’t pay taxes themselves, but “pass” along the profits and tax liabilities to investors — who then pay the taxes on their individual returns.


Low base

A 50 percent increase in the number of new audits next year could still mean that the agency has a long way to go to resume higher audit ratios, because it’s starting from a low base. The IRS audited only 140 partnership returns of the more than 4 million returns filed in 2018 — less than 0.00004 percent -- according to the most recent data from the agency. That’s down from about 0.5 percent of partnership returns that were audited in 2010.


For S corporations, another type of pass-through entity, the IRS audited 397 returns — roughly 0.01% of all filed — in 2018, according to agency data.


The IRS is hiring 50 more specialized auditors to work these cases, with the aim of having them in place by February, Harris said. The IRS can select returns to audit that are up to three years old. If the agency finds significant problems in a taxpayer’s filings, the auditors can examine returns that are even older.


New audit procedures that Congress approved in 2015 mean that the IRS can more easily collect any underpaid taxes it finds during the audit. Instead of having to track down each investor, the IRS can now collect the money from the partnership itself.




IRS clarifies deductibility of PPP loan expenses, as AICPA criticizes forgiveness questionnaire

By Michael Cohn


The Internal Revenue Service and the Treasury Department have issued guidance to clear up the tax treatment of expenses when a loan from the Small Business Administration’s Paycheck Protection Program hasn’t been forgiven by the end of the year, while groups including the American Institute of CPAs are complaining about a new, lengthy questionnaire from the SBA for forgiveness of loans of $2 million or more.


The IRS and the Treasury issued both a revenue ruling and a revenue procedure, essentially saying that since businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible.


"This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket," said the Treasury in a news release. "If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Therefore, we encourage businesses to file for forgiveness as soon as possible."


In cases where a PPP loan was expected to be forgiven, but it isn’t, businesses will be able to deduct those expenses. “Today’s guidance provides taxpayers with greater clarity and flexibility,” said Treasury Secretary Steven Mnuchin in a statement Wednesday. “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”

The revenue procedure issued by the IRS and the Treasury, Rev. Proc. 2020-51, provides a safe harbor for PPP loan participants whose loan forgiveness has been partially or fully denied, or who decide to forego requesting loan forgiveness, to claim a deduction for certain otherwise deductible eligible payments on (1) the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for the 2020 taxable year, or (2) an amended return or an administrative adjustment request (AAR) under section 6227 of the Tax Code for the 2020 taxable year, as applicable. For taxpayers who decide to forego requesting loan forgiveness, the safe harbor also permits these taxpayers to claim a deduction for the otherwise deductible eligible payments on an original income tax return or information return, as applicable, for the taxable year in which the taxpayer decides to forego requesting forgiveness.


The revenue ruling, Rev. Rul. 2020-27, offers guidance on whether a PPP loan participant that has paid or incurred certain otherwise deductible expenses can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan. The revenue ruling also includes guidance if, as of the end of the 2020 tax year, the PPP loan participant has not applied for forgiveness, but intends to apply in the next taxable year.


Both pieces of guidance answer some questions, but some tax experts will still have questions. “While the Ruling and Rev Proc provide information on the deductibility of expenses and the tactical approach for borrowers whose forgiveness is denied or not requested, additional clarification is still needed,” said an email to clients Thursday from Aprio, a Top 100 Firm. “This guidance does not address the order in which the eligible expenses (payroll, rent, utilities and mortgage interest) lose the ability to be deducted. Further, the guidance does not address other matters that could have significant tax implications including, but not limited to, the impact on the following:

  • Qualified business income deduction (Section 199A);
  • Research and development credits; and
  • Interest deduction limitation (Section 163(j)).


The IRS and the Treasury also recently released guidance in Notice 2020-32 about deducting expenses for PPP loans. The notice clarifies that no deduction is allowed under the Tax Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the loan under the CARES Act, and the income associated with the forgiveness is excluded from gross income.


The leaders of the Senate Finance Committee, chairman Chuck Grassley, R-Iowa, who is now battling a coronavirus infection, and ranking member Ron Wyden, D-Oregon, blasted the guidance issued by the Treasury. “Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said in a joint statement Thursday. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”


Grassley and Wyden said they would continue their efforts to clarify in any end-of-year legislation the intended relief in the CARES Act to help small businesses at this critical time. “We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most,” they added.


Loan necessity questionnaire

Separately, the American Institute of CPAs joined with more than 80 other trade and business groups in a letter Tuesday expressing concern about the loan necessity questionnaires being sent by the SBA to PPP borrowers who received loans of $2 million or more. They complained that the questionnaires are long and burdensome and require extensive documentation.


“We strongly believe that the vast majority of small businesses needed their PPP loan to stay in business and retain employees, and many still need additional financial support,” said Erik Asgeirsson, president and CEO of, in a statement. “These ongoing changes and new requirements could impact future business decisions on applying for more relief.”


In the letter, which was sent to House Speaker Nancy Pelosi, D-California, and House Minority Leader Kevin McCarthy, R-California, Senate Majority Leader Mitch McConnell, R-Kentucky, and Senate Minority Leader Charles Schumer, D-New York, Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza, the AICPA and the other business groups suggested that existing PPP Forgiveness Applications — specifically, SBA Forms 3508, 3508EZ and 3508S — should still be used because they “…allow the agencies to examine, in greater detail and prior to the approval of loan forgiveness, relevant facts to ensure that the PPP loan funds were used in the way Congress intended.”


They pointed out that the new questionnaires focus on the wrong time frame during which the PPP loan must be assessed by asking for gross revenue comparisons between 2020 Q2 and 2019 Q2 and other metrics and narratives that describe how the borrower has fared during the pandemic. However, they noted, PPP borrowers were required to certify in good faith that the loan was needed at the time of the request. “Any circumstances that happened after the certification was made and throughout the pandemic should have no bearing on evaluating the borrower’s good fair statement at the time it made the certification,” said the letter.


In addition, the new forms ask for liquidity and revenue data, which could expose the personal finances of small business owners. “The CARES Act did not include a means-based test, revenue reduction test, liquidity test or any other metric to assess financial standing in order to assign prioritization of PPP loans to certain borrowers over others,” said the letter


The AICPA and the other groups, including the American Bankers Association, the National Association of Manufacturers and the U.S. Chamber of Commerce, also argued that questions about revenue and liquidity data signal a bias against PPP borrowers who have managed to survive or remain profitable during the pandemic. Steady or increased revenue with healthy liquidity and continuing employment is a sign that the PPP loan was successful, they pointed out.

Other questions in the form prompt concerns that a borrower’s answer could lead to a misinformed analysis by the agenciesFor instance, requests for statements on whether closures or changes in operations were mandatory or voluntary and details on which governmental jurisdiction mandated the closures.


The questionnaires also apply impractical compliance deadlines on borrowers and lenders that would be impossible in many cases, the AICPA and the other business groups note. “The nine-page questionnaire demands a level and type of reporting never previously required from borrowers by statute or in any process in PPP lending thus far,” they wrote.




Coronavirus delays IRS reorganization

By Michael Cohn


The novel coronavirus pandemic is throwing a monkey wrench into plans for the Internal Revenue Service to reorganize itself to provide better taxpayer service, as mandated by the Taxpayer First Act that Congress passed last year.


A new report released Wednesday by the Government Accountability Office found that so far the IRS's planning has only partially or generally reflected the main best practices for reforming an agency. For example, while there is a senior-level team leading the reorganization at the IRS, COVID-19 has delayed the planning for the restructuring. That leaves it unclear right now when or whether other key practices involving outcome-oriented goals and performance measures will be more fully addressed.


There may be some advantages to the status quo, however. For example, one advantage of the current structure, according to several officials interviewed by the GAO, is that over the years the IRS's divisions have developed specialized expertise in various types of taxpayers with similar needs, such as small businesses. Several of the people interviewed for the report think that dealing with some of the IRS's challenges may not require significant changes to the IRS's organizational structure after all. The GAO and others have identified a number of challenges and options to improve the IRS's structure, processes and operations in several areas, including customer service, communication and coordination within the IRS, technology, strategic human capital management and training.


So far, the IRS has made some progress, even though the pandemic is slowing it down. It has established a senior-level team, known as the Taxpayer First Act Office, to lead the reorganization planning. The effort has involved IRS employees and some of the agency’s key stakeholders, including tax professionals, and employed multiple sources of data and evidence to inform its planning. But while the IRS has developed some preliminary goals for its plan, it hasn’t yet finalized and communicated the goals and performance measures for the plan. The IRS has also researched some potential actions it might take to deal with some of the long-standing management challenges at IRS, such as those related to areas of fragmentation, overlap, duplication and high risk that the GAO has identified over the years. Nevertheless, the IRS hasn’t yet decided on the specific actions it will take to address those areas in its plan.


IRS officials told the GAO they intend to take those additional steps, but the pandemic has delayed the completion of its reorganization plan until next month. As a result, according to the GAO, it’s still unclear whether the reorganization plan will include any outcome-oriented goals and performance measures or whether it will identify specific actions to address the long-standing management challenges. Taking such steps could help the IRS identify and achieve the intended outcomes of the reorganization plan, while also identifying some reforms that could create long-term gains in efficiency and effectiveness for the agency.


\The GAO recommended that the IRS should finalize its goals and performance measures, and identify specific actions to address long-standing management challenges. The IRS said it plans to implement the GAO's recommendations when it submits its final reorganization plan to Congress in December.


“The IRS is dedicated to our mission of helping our nation’s taxpayers understand and meet their tax responsibilities,” wrote IRS commissioner Charles Rettig in response to the report. “We welcome the opportunity provided by the Taxpayer First Act to reimagine how we interact with taxpayers and to rethink the way we operate.”




4 key year-end tax moves for 2020

Seize the chance to reduce taxes by acting before the end of the year.



Key takeaways

  • There’s still time left in 2020 to take stock of your financial situation and make some tax-savvy moves.
  • You may want to review where you stand year-to-date with your tax payments and retirement contributions and adjust as needed.
  • Now is a good time to assess your investments and see if you need to rebalance or have any opportunities to offset gains with deductible losses.
  • If you are over 72, make sure you understand the rule changes for required minimum distributions this year, and consider ways to make the most of the pause.
  • Make a charitable giving plan that aligns with your values and is as tax-efficient as possible.


Nothing about 2020 has been predictable or routine, so you might as well shake up your year-end tax preparations. Depending on what happens to the balance of power in the US Senate, there may be changes afoot to tax laws in 2021, so now may be a good time to take stock of your financial situation and see what moves you want to make in the last few weeks of the year.


Here are 4 tips to help you get started:

1. Do a financial checkup

Many people will find that their income has fluctuated in some way in 2020, because of job loss, a change in hours, or a shift in your bonus. The best place to start is with your latest paystub and see how your year-to-date column is shaping up.


You may be out of whack with the amount of taxes you have paid so far, and if so you can adjust your tax withholding before the end of the year. If you do this, you could potentially avoid a large tax bill in April when you file your return, or a large refund when you could use the cash now. You may also reduce underpayment penalties if you have not paid in enough taxes during 2020. If you received any untaxed unemployment payments, you could adjust your withholding to have extra taken out for the last few weeks of the year if you are now working again. The same goes if you have a bonus on the way: Those are typically only withheld at 22%, so if you are in a higher bracket overall, you may owe an additional amount you aren’t expecting.


You also may be off-target for your retirement account contributions for the year. On the one hand, it can be unwieldy to fix if you contribute more than the maximum $19,500 allowed by the IRS to workplace plans. On the other, it can be a missed opportunity not to contribute as much as you are able for the year.


Tip: Don’t forget: If you are over 50, you can make catch-up contributions of an additional $6,500 to 401(k)s and other qualified workplace retirement plans until December 31. For more see: 50 or older? 4 ways to catch up your savings.


It’s possible that you have additional savings you weren’t expecting because of restricted spending opportunities in 2020. If you have your current budget and debt under control, you may want to think about investing the funds you don't need in cash for an emergency fund for the long term. To maximize your tax advantages, and assuming it’s appropriate for your goals, you can consider a contribution to a 529 educational savings account or a health savings account (HSA), both of which are due by December 31. You could also contribute to a traditional IRA or Roth for 2020, if you have qualify,1 but those 2020 contributions can be made through April 15, 2021.


2. Harvest and rebalance

If you have realized capital gains in taxable accounts during the year, you may want to look at tax-loss harvesting, which is selling positions at a loss to offset those gains, plus up to $3,000 in taxable ordinary income annually. You can then reinvest the proceeds in a similar (but not substantially identical) security to maintain your investment strategy, but be sure to comply with IRS "wash sale" rules.


However, the tax benefits of this may not outweigh the potential growth of your holdings right now, so consider your options carefully. “This year in particular, you don’t want to let taxes rule your decisions. Do you really want to sell something that’s down now just for tax purposes and lose out on the potential market upside?” asks Christopher Williams, principal at EY Private Client Services.


For both your taxable and tax-deferred accounts, you may want to look at rebalancing if your positions are no longer aligned to your long-term goals. Above all, look at whether your asset mix is where you want it, because the current run-up of the market may have skewed the allocation in your accounts.


If you are a high earner, and particularly if you live in a high tax state like New York or California, you may want to look at municipal bonds. Interest from tax-exempt municipal bonds is generally free from federal income taxes, and in some cases state and local income taxes as well.2


Tip: You may want to avoid buying a mutual fund right before it makes its year-end distribution, or you may have an unexpected tax bill. Read: Mutual fund taxes.


If you find that you are out of balance, you may want to consider prioritizing the sale of holdings in your qualified accounts (those containing money that has not been taxed as income). If you sell appreciated stocks in your taxable accounts now, taxes on the resulting capital gains would be due in just a few months, whereas sales of appreciated securities in qualified accounts are not taxable.


“In any qualified account, you can think about rebalancing any time of year,” says Williams.


3. Make the most of the RMD pause

If you’re over 70, you’re probably used to seeing reminders at the end of year to make sure to take your required minimum distributions (RMDs) before December 31 or face big penalties.


The IRS now requires most people to start taking money out of their tax-deferred retirement accounts once they reach age 72, rather than age 70, but that is on pause this year. If you are a 74-year-old who has around $1 million saved in an IRA, that amounts to about $42,000 less in income for the year, which in turn could yield as much as $15,500 or so in reduced federal income tax for the year, depending on your financial situation.


A Roth conversion could be a benefit in this situation, since the reduced income might mean that you’re in a lower tax bracket than usual. Because you pay taxes on your conversion amounts up front, rather than when you withdraw money, you'll owe no taxes on future earnings if your withdrawals are qualified. In general, if you believe that your future tax rates may go up, either because of legislative changes or because of higher future growth, a Roth conversion could save you money—so this could be a good move this year, and may potentially seem ever better down the road. Another potential advantage: Roth IRAs don't have required minimum distributions (RMDs) during the lifetime of the original owner.


"The so-called RMD vacation in 2020 may push some retirees into a lower tax bracket, and that creates an opportunity for them to look into converting some of their tax-deferred savings to a Roth IRA at a lower rate than usual," says Matthew Kenigsberg, vice president of taxes and investments at Fidelity.


Tip: For more on RMD vacation strategies, read Make the most of your RMD vacation.


4. Make a giving plan

In the midst of a global crisis, charitable giving will be a major focus at the end of the year. The CARES Act for COVID-19 relief provides a $300 deduction from income for charitable giving on the 2020 income tax return, regardless of whether you take the standard deduction or itemize.


If you plan to give more generously than that, you may want to consider ways to make use of existing tax advantages, especially if you think your income tax rate may go up in the future.


“When it comes to year-end, people know what their itemized deductions look like. If you’re getting close to the standard deduction cap, a charitable contribution can push you over,” says Williams.


If you’d need more than your usual charitable contribution in order to exceed the standard deduction, consider "bunching." That means concentrating charitable contributions into a single year, then skipping them for a few years. The catch is that this strategy requires having the financial capacity to pack all your deductions into one year.


If you're considering a bunching strategy, a donor-advised fund may be appealing. That way you can contribute several years of charitable contributions in one year, making the most of the deduction in that year, but spread your giving over multiple years. 


Tip: Donating highly appreciated assets that you’ve held more than a year helps you avoid capital gains taxes. Try our calculator to model the potential impact of bunching in different financial situations.


The bottom line


The end of the year is a good time to check on your financial accounts. The last day of December is sometimes a significant deadline so it can make sense to do some year-end housekeeping, including evaluating tax strategies and making plans for the coming year.


Of course, tax planning is not a one-and-done exercise. To help reduce taxes, it makes sense to be planning throughout the year. Need help? Fidelity advisors can help you build a tax-smart investing plan that works for you.




Billionaire sues Deloitte and law firm for $72M over tax advice

By Anthony Aarons


Billionaire Chris Rokos, who runs the hedge fund that bears his name, sued Deloitte and a U.S. law firm after 39.4 million pounds ($52 million) in tax relief was thrown out by U.K. authorities.

Rokos sued his advisers over a decade-old investment in a commercial development that was supposed to yield a significant tax break. But in 2016, authorities rejected the claim and demanded payment of the full amount Rokos “had claimed as capital allowances,” his lawyers said in a London court filing earlier this month.


The 50-year-old hedge-fund founder is one of many U.K. financial professionals caught up in tax schemes that were later thrown out by Her Majesty’s Revenue and Customs. A number of London bankers invested in film projects that were popular tax-avoidance vehicles before the turn of the century.


A spokesperson for McDermott, Will & Emery said that the claim is without merit and the law firm would “defend this vigorously.” Officials at Deloitte, one of the “Big Four” accounting firms, declined to comment as did a spokesman for Rokos.


Officials at HMRC didn’t immediately return calls for comment.


The lawsuit seeks more than 53 million pounds. Rokos wants reimbursement for the 39.4 million pounds in tax, plus another 13.7 million pounds in additional levies and 1.7 million pounds, the cost of his fight with HMRC.


Risky investments

Rokos argues that the accounting firm and McDermott, Will & Emery should have provided more warning about the risky nature of the investment.


Both firms owed Rokos “an implied contractual duty” to “act on his behalf with the care, skill and diligence to be expected of” reasonably competent tax and investment advisers.


The investment dates back to 2009 when Rokos, who at that point still worked for Brevan Howard, made a gross investment of 100 million pounds in a “syndicate” that planned to obtain an interest in a commercial property situated in the Tyne Riverside Enterprise Zone. Enterprise zones are designed to provide government support to encourage investment and economic growth.


The founder of Rokos Capital Management LLP isn’t the only person who invested in tax plans linked to enterprise zones. Celebrities including former Manchester United player Wayne Rooney and comedian Jimmy Carr put funds into similar schemes, which are the subject of appeals in London starting Tuesday.


The syndicate members, including Rokos, “then claimed capital allowances on this amount, less a small disallowance in respect of the value of the land,” according to the lawsuit.


The plan would have cut Rokos’ taxable income by 98.6 million pounds in the tax year ending in April 2009 had it been accepted by the HMRC. That would have saved him the 39.4 million pounds in levies at the center of the dispute.



The project to develop a data center at the site was actually oversubscribed and Rokos had cut his planned investment from 126 million pounds. The final investment consisted of a “capital contribution of 40 million pounds,” plus a 60 million-pound share of a loan.


But in 2017, after HMRC had rejected the claim, Rokos had to pay more than the original 39.4 million pounds.


The lawsuit is another potential hurdle for Deloitte, which has been fined by regulators in recent months over its audits for companies including Autonomy Corp. and for its work on a corporate pension plan.


Deloitte and the other three firms that make up the Big Four have faced years of criticism for their audit shortcomings. That has prompted the Financial Reporting Council to order the split of their accounting and consulting arms, which all four agreed to do by 2024.




$7.2M in SBA coronavirus aid went to family’s fake farms

By Polly Mosendz, Zachary Mider and Jeff Green


The single-family house on Forestview Avenue in Euclid, Ohio, a suburb of Cleveland, shows no signs of farming activity. The only things growing on the one-eighth-acre plot are trees, shrubs and grass.


But 20 companies registered at that address, with names like Organic Ohio Berries LLC and Garlic Farming LLC, have won government approval for loans and grants intended to support small businesses hurt by the pandemic.


In all, the owner of the Forestview home and his family members created 72 companies with agrarian-sounding names at three Cleveland-area addresses and then used them to get approval for loans and grants totaling $7.2 million from the Small Business Administration’s Economic Injury Disaster Loan program, state and federal records show. There’s no sign of agricultural activity at any of the locations, or that any of the companies were active before Feb. 1, a requirement for pandemic aid. None of them was registered with the Ohio Secretary of State’s office before May.


A lawyer for Zaur Kalantarli, the owner of the Forestview house, acknowledged in an interview this week that at least some of the loans were questionable and may have to be repaid. The lawyer, Edward La Rue of Cleveland, said he contacted federal prosecutors in Ohio on Monday and brought the matter to their attention. La Rue said Kalantarli hired him on Nov. 12 after an inquiry from Bloomberg News.


The Kalantarli loans are the latest sign of mismanagement in the SBA’s $212 billion disaster-relief program, which the agency’s inspector general warned in July was beset by “potentially rampant fraud.” They raised red flags that even the most basic controls should have spotted: more than a dozen loans flowing to the same street address and companies created after the eligibility date.


The disaster-relief program has distributed 3.6 million loans worth $192 billion to small businesses since March, as well as 5.8 million grants that don’t have to be repaid totaling $20 billion. It’s distinct from the SBA’s $525 billion Paycheck Protection Program, which relied on banks to distribute forgivable loans meant to cover payroll.


A $750 million computer program set up by the SBA in April was supposed to flag suspicious disaster-aid applications before they were approved, but last month Bloomberg News quoted current and former SBA workers and outside fraud investigators describing widespread fraud that the computers had failed to catch. Even a person posing as President Donald Trump made off with a $5,000 grant.


A spokesperson for the SBA said the agency wouldn’t comment on individual borrowers but that it “takes very seriously its stewardship of taxpayer funds and is committed to mitigating risks of fraud, waste and abuse.”


Bloomberg News spotted the Kalantarli loans by searching for companies that got disaster aid despite being created after the eligibility date. Names and states of loan recipients were matched against companies in a database provided by OpenCorporates Ltd., a U.K. firm that aggregates corporate records. That yielded a list of 10,685 loans that went to entities created on Feb. 1 or after. In examining this list for multiple loans at the same street address, Kalantarli’s popped out.

Not all of the 10,685 companies are ineligible for aid. Some were in business for years and incorporated only recently. But a random sampling suggests that a significant number are registered to residential addresses, with no digital sign of business activity, such as a business license or a presence on Google or Facebook. Several clusters of loan recipients, like Kalantarli’s companies, were created by the same person in rapid succession. The loan data made public by the SBA show only approval decisions and don’t indicate if all the loans were funded or if some were later canceled.


Last month, SBA Inspector General Hannibal “Mike” Ware said he found 22,706 loans and 45,385 grants, worth a total of $1.1 billion, that went to companies that obtained tax identification numbers on Feb. 1 or later. He faulted the agency for not checking tax ID registration dates prior to issuing aid. The SBA disagreed, saying a late creation date isn’t definitive proof of fraud and that it hadn’t been able to get access to the relevant data from the Internal Revenue Service.


The creation of new, phony companies is probably responsible for only a small fraction of the fraud that occurred in the program. Applicants don’t need a formal legal entity or tax ID to be eligible. Bloomberg News reviewed several fraud tutorials posted on social media, all of which recommended applying as an unincorporated sole proprietor.


But nobody outside the SBA can check for fraud among sole proprietors because the agency has chosen to keep names and street addresses of these recipients secret. These redactions amount to 46 percent of grant recipients and 41 percent of loan recipients. In May, media organizations including Bloomberg News sued to force the SBA to release this information under the Freedom of Information Act. The SBA argued that the redactions were necessary to protect borrower privacy. On Nov. 5, a federal judge ordered the SBA to make the data public. The agency is considering an appeal.


Kalantarli’s postings on social media portray a hard-working entrepreneur who immigrated to the U.S. from Azerbaijan in 2015 after winning the permanent-resident lottery. He was later joined by two brothers. He operated a print and sign shop in Los Angeles and then branched into buying and repairing houses in the Cleveland area. Four companies that predated the pandemic, linked to the printing and real estate businesses, received SBA loans and grants in May and June, although one of those loans was later canceled for undisclosed reasons.


A day after the first of those loans was approved, Kalantarli registered the first of the 72 agriculture-themed companies, all of which used the address of his house on Forestview or two other suburban properties owned by a company he controls. A visit this month showed that each is a modest suburban home with a small yard and no sign of agricultural activity. The registered agents for the companies are Kalantarli, his relatives and another unidentified person who shares his last name. Although Kalantarli posts extensively on social media about his various business ventures, Bloomberg News found no mention of farming activity.


The new companies began winning approval for loans of $150,000 on June 17, with nine of the entities, including Ohio Almonds & Peanuts LLC and Agriculture Worms & Fertilizers LLC, getting approved on the same day. The SBA continued approving loans to the companies as late as Aug. 10, well after the inspector general first raised concern about the program, the data show. The companies also won $183,000 in SBA grants, an amount that corresponds to a headcount of 183 employees. Bloomberg News was unable to identify anyone who works for any of the companies.


“I certainly see why you noticed things that did not seem to comport with the SBA guidelines,” said La Rue, who is representing Kalantarli and two of his brothers. La Rue said he was still gathering information but that his clients may have misunderstood program rules. “This was done in a slapdash fashion, very quickly, in the mindset of, ‘This is coming to any business owner who wishes it,’” he said.


La Rue said none of the Kalantarli brothers had been contacted by law enforcement or by the SBA. He said his clients might have to return millions of dollars. “We are looking to move forward,” he said, “to do what we can do to ameliorate the situation.”




The craziest work-from-home expenses of 2020

By Michael Cohn


Employees working from home during the coronavirus pandemic claimed some outlandish expenses this year, including pricey exercise bikes, facelifts and private jets.


Emburse, an expense management software company, released a compilation Wednesday of some of the craziest expenses it has seen claimed this year, some of which were actually approved. That included $1,895, which was approved as a contribution for an employee's Peloton Bike under the explanation of “for health and wellness.” On the other hand, a $7,600 expense claim for a facelift was submitted under the category of “repairs and maintenance” but was rejected, despite the pressing need to look one’s best during a Zoom meeting.


Some expenses weren’t for working from home, but more about getting out of the house safely. An expense claim for a private jet charter costing over $20,000 was submitted and approved under the explanation of “required to limit COVID exposure for international shoots.” Another travel-related expense claim was $2,500 for a helicopter ride, which was not approved.


The $79 expense claim for a dog crate could perhaps be used for travel at some point when that's safer, but in these times it was more plausibly to provide "crate training [for] a new COVID puppy to not run into Zoom meetings."

Below is an infographic produced by Emburse showing this and several other head-scratching claims:



More audits of the rich's tax returns could yield trillions

By Natasha Sarin


When President-elect Joe Biden takes office in January, he’ll face a quandary: how to reform the tax system to raise much-needed government revenue. One promising option: Give the Internal Revenue Service the resources needed to ensure the wealthiest are paying the taxes they already owe.


As it turns out, Donald Trump isn’t the only affluent American partial to aggressive tax maneuvers. Private equity executive Robert Smith, who made headlines in 2019 by pledging to pay off student loans for Morehouse College graduates, recently admitted to criminal tax evasion of hundreds of millions of dollars over a 15-year period (he will pay back taxes and penalties but avoid prison). The Justice Department has also indicted software executive Robert T. Brockman, claiming he concealed approximately $2 billion in income (with Smith’s help) in an offshoring scheme featuring a computer program aptly named “Evidence Eliminator.”


Such cases are noteworthy not just for the large unpaid tax bills, but also for their extreme rarity. More commonly, high-income individuals skirt their tax liabilities with no consequence at all. Criminal tax fraud cases are at their lowest level since 2002 —
only 700 were initiated last year, down 40 percent from a decade earlier. Audit rates for taxpayers with annual incomes of $10 million or more stood at less than 7 percent in 2018, down from almost 30 percent in 2011. The Treasury’s inspector general recently estimated that the IRS missed out on more than $40 billion in revenue by failing to pursue cases against thousands of high-income individuals.


Poor Americans haven’t experienced the same leniency. The audit rate for recipients of the Earned Income Tax Credit, a program designed to keep low-wage workers out of poverty, has declined at a much slower pace — thanks in large part to Republican legislators, who have pressured the IRS to stamp out alleged fraud. The activity, often triggered by innocent mistakes or errors committed by unregulated tax preparers, generates little revenue per audit, because so few tax dollars are at stake. But it creates a huge headache for already overburdened families. Today, EITC recipients are about as likely to get audited as the top 1 percent of earners, and the five counties with the highest audit rates in the U.S. are low-income, predominantly Black communities. For these taxpayers, aggressive IRS scrutiny is yet another burden of being Black and poor.


A recent IRS report by Deputy Commissioner Sunita Lough points out that the agency does in fact audit high earners at higher rates. But while true on average, this misses important trends in enforcement. Perversely, audit rates have fallen most for those at the top of the income distribution.

Why the inequitable approach? It’s no fault of the IRS, which is being forced to make do with less: Congress has cut its budget by 15 percent since 2011, resulting in a 20 percent reduction in staff. Attrition rates have been highest among the experienced and highly skilled examiners capable of handling complex audits of high-income individuals, according to IRS Commissioner Charles Rettig. As a result, the agency cannot simply shift examination resources from the poor to the wealthy — so when the latter fail to file their tax returns, they are often pursued with no more than a series of notices, if at all.


The solution is simple: Provide the IRS with the budget needed to do its job, and direct it to focus on the cases likely to yield the most revenue. Current and former IRS officials agree, and legislation along these lines has even been introduced. Strengthening enforcement is already part of Biden’s tax plan.


Research that I conducted with former Treasury Secretary Larry Summers suggests that restoring enforcement to historical levels could generate more than $1 trillion in the next decade — more than enough to fund important policy initiatives like universal pre-K and paid parental leave.

All that’s needed is the political will to police the many wealthy Americans whose names — unlike Trump, Smith and Brockman — haven’t been in the headlines, because nobody has properly scrutinized their tax returns.




Biden Could Provide Business and Household Relief by Eliminating Trump Tariffs

By Erica York

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One of President Donald Trump’s signature policy actions has been to engage in a tit-for-tat tariff war with America’s trading partners, and one of the big questions is what President-elect Joe Biden will do about that.


First, a brief review of where things stand. Relying on rarely used sections of trade law, President Trump used executive authority to impose tariffs on the import of solar panels, washing machines, steel and aluminum, Chinese products, and other types of goods. These tariffs invited retaliation from other countries. According to analysts Tom Lee and Jacqueline Varas’s tabulations of 2019 import values and 2018 export values, more than $460 billion worth of traded goods are caught up in the trade war.


Tariffs raise prices and reduce the quantity of goods available to U.S. businesses and consumers, which results in lower incomes, reduced employment, and lower economic output in the United States. Using the Tax Foundation General Equilibrium Model, we estimated (based on import levels when tariffs were put in place) that the Trump administration tariffs would amount to an annual tax increase of $80 billion. If left in place permanently, all else equal, the tariffs would reduce long-term output by 0.23 percent, reduce wages by 0.15 percent, and eliminate nearly 180,000 full-time equivalent jobs. The 0.23 percent reduction in long-run GDP is about 13.5 percent of the total long-run impact of the Tax Cuts and Jobs Act (TCJA), which we estimated would raise long-term GDP by 1.7 percent. Also important to note is that tariffs are regressive, meaning their tax burden falls hardest on lower- and middle-income households.


Biden has not specified how he would approach the Trump tariffs, though his advisers have said he will at least review them.


The road ahead for many of Biden’s agenda items, including more economic relief and stimulus, is uncertain. As my colleague Garrett Watson explained, “A Biden administration may have to work with a Republican Senate majority (pending the results of runoff elections in Georgia) and a Democratic-controlled House to navigate various tax policy issues in the coming year, including another round of pandemic-related economic relief.”


In contrast, reducing or eliminating the Trump tariffs, which a Biden administration could do without congressional authorization, would be a relatively quick form of relief to businesses and households, with outsized benefits to lower- and middle-income households (recall that tariffs are regressive).


Some might argue that even though tariffs are damaging, the Trump administration had good reason to impose them, and a Biden administration should continue them. The evidence on tariffs in general and Trump’s tariffs in particular show that the negative effects outweigh any small, temporary protection that may be afforded to specific industries. For example:

  • A recently published study by Davide Furceri, Swarnali A. Hannan, Jonathan D. Ostry, and Andrew K. Rose (“Macroeconomic Consequences of Tariffs,” 2018) provides evidence of tariffs’ negative effects by reviewing tariff changes across 151 countries from 1963 to 2014. The research finds that tariff increases lead to less output and productivity and more unemployment and inequality and that the negative effects are magnified when tariffs are increased during expansions and in advanced economies.
  • Fernando Leibovici of the St. Louis Fed (“How Could Higher Tariffs Affect American Manufacturers,” 2018) analyzed how tariffs on Chinese imports impact the U.S. manufacturing sector, supporting the idea that raising tariffs on intermediate goods will hurt manufacturers more than it helps because tariffs significantly increase costs of production across the U.S. manufacturing sector.
  • Ana Maria Santacreu and Makenzie Peake of the St. Louis Fed (“The Economic Effects of the 2018 U.S. Trade Policy: A State-Level Analysis,” 2020) analyzed the correlation between trade exposure and economic activity, finding “states that were very exposed to trade at the onset of the trade war experienced worse outcomes in terms of employment and output growth.” The Cato Institute’s Scott Lincicome notes this study also pokes a hole in the idea that protectionist policies are politically helpful.
  • Aaron Flaaen and Justin Pierce of the Federal Reserve Board (“Disentangling the Effects of the 2018-2019 Tariffs on a Globally Connected U.S. Manufacturing Sector,” 2019) find that “U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs. Higher tariffs are also associated with relative increases in producer prices via rising input costs.”
  • Scott Lincicome summarizes a litany of tariff research, including evidence on the failure of steel tariffs: “After two‐​plus years of ‘national security’ tariffs and quotas on a wide range of steel imports from almost all major sources, Big Steel is once again hurting (pain that began before COVID-19) and going back to the government for help. …What they don’t mention, however, is what might actually work: eliminating the tariffs, which have been shown to hurt U.S. manufacturing and even several domestic steelmakers, and imposing long‐​term market discipline on Big Steel—a discipline it hasn’t faced in decades (if ever).”


While there is wide agreement that concerns over unfair trading practices ought to be addressed, the tariffs imposed by Trump are not the appropriate policy tool. Ultimately, tariffs result in net decreases in productivity, output, and income. Consumers lose more than producers gain from tariffs, resulting in a net loss to the economy. Tariffs also have a negative effect on America’s global relationships.


President-elect Biden reducing or eliminating the Trump administration tariffs would provide immediate relief to U.S. businesses and households as imports would no longer face those taxes, though business adjustments may take some time. It would also signal the end of the era of trade uncertainty caused by the Trump administration and would be a positive move toward rebuilding damaged trading relationships while working with allies to address unfair trading practices.



IRS to resume house visits to suspected tax cheats

By Laura Davison


Internal Revenue Service agents will resume knocking on doors of suspected high-income tax avoiders after the coronavirus pandemic passes, two agency officials said Monday.

“We’ll come knocking and asking,” said James Robnett, deputy chief of IRS Criminal Investigation. “Even more, we will be knocking on doors in the coming months to make sure these high-income non-filers comply.”

IRS agents since February have been following up with high-income individuals who earned at least $100,00, but failed to file income tax returns. Some efforts were delayed or paused because of the pandemic, but the agency plans to resume and expand them once the health crisis rescinds, Darren Guillot, an IRS deputy commissioner for collections and operations support, said at an American Institute of CPAs event.


In fiscal year 2020, the IRS launched 279 investigations into individuals who have failed to file tax returns and so far has recommended 146 for prosecution, Robnett said. Of those, there have been 96 indictments and 80 individuals sentenced for an average of 36 months in prison, he said.

The IRS has concentrated efforts in the last year on identifying an estimated 9 million individuals who have not filed a tax return. The contact is typically the final step before the IRS pursues more severe action, such as criminal or civil cases against that individual.


The focus on high-income non-filers comes as the IRS is initiating more criminal investigations, but indictments and convictions continue to fall. The IRS launched 2,596 criminal probes in fiscal year 2020, the first annual increase after six consecutive decreases. In the 2013 fiscal year, when that decline began, the IRS Criminal Investigation division opened 5,314 cases, the highest number in the past 15 years, according to IRS data.


The IRS said it identified $2.3 billion in tax fraud, up from $1.8 billion a year prior. Still, an agency watchdog found in a June report that there are tens of billions of dollars of uncollected taxes from people who don’t file tax returns. The Treasury Inspector General for Tax Administration released a report that said 879,415 high-income individuals who didn’t file returns cumulatively failed to pay $45.7 billion in taxes from 2014 to 2016.


The agency offers some relief to individuals who are behind on filing their tax returns if they voluntarily file the paperwork before the IRS comes after them, Guillot said. Even if the taxpayer can’t pay what they owe, late-payment penalties are less expensive than the fines for failing to file a tax return and paying past the deadline, he said.


“The message is really, really clear here,” Robnett said. “File now.”




Will tax audits, enforcement increase to make up for pandemic shortfalls?

By Jeff Stimpson


Googling “pandemic affects tax revenues” turns up a trend in headlines, with phrases like “slashes,” “slice out of” and “falls sharply” appearing frequently. COVID-19 and the subsequent shutdowns sent tax revenues, often propelled by sales tax losses, straight down.


Though scattered locales now report surprisingly good revenues for the third quarter, the fear persists that sometime, some way, state and local jurisdictions are going to try to make up the losses.


“Many clients expect that states and municipalities may have no other choice but to raise income tax rates, expand their tax base and increase enforcement activities to address budget pressures resulting from all of the unanticipated costs to handle the COVID-19 emergency,” said James McGrory, a CPA and shareholder at Drucker & Scaccetti in Philadelphia, in a state where most tax revenues have recently beat estimates.


“Audits are increasing, albeit by bots, algorithms and big data,” said Daniel Morris, a CPA and senior partner at Morris and D’Angelo CPAs in San Jose, California — another state that’s reported better-than-expected revenues so far.


Armies from where?

The surprising rebounds followed the second quarter, when state and local tax receipts fell almost 4 percent compared with the year-earlier period, according to The Tax Foundation.


Income and sales taxes fell “considerably” while property and excise tax collections remained stable. State and local spending came in 0.7 percent lower in the second quarter of 2020 than it did in the same period a year earlier. “States are using federal aid, and the expectation of recapturing delayed collections, to keep spending more stable than tax revenues,” the Foundation added.


The questions now: Is the recent rebound real or will it turn out to be an anomaly between the initial pandemic-ignited downturn and an even darker economy as federal stimulus dries up? And how will “the expectation of recapturing delayed collections” play out on the local level?


“Clients are always worried about audits and enforcements. I do believe there will be a significant increase in automated collections but think there will be a bigger delay on the audit side,” said Chris Hardy, an Enrolled Agent and managing director at Georgia-based Paramount Tax and Accounting. “Both states and feds are significantly behind in processing correspondence, which will delay their ability to ramp up any significant audit efforts.”


When exactly will jurisdictions have the resources to unleash armies of auditors? “It takes money to hire people or technology to do those increased audits and enforcement … an investment for them. If it’s not in the budget now, it won’t be in a lesser budget due to the pandemic,” said CPA Daniel Henn in Rockledge, Florida. “States, unlike the federal government, don’t have a blank check to hire a bunch of people or buy new technology.”


Squeeze plays

Future enforcement could take many forms, preparers said, involving various techniques — and various taxpayer targets. Drucker & Scaccetti’s McGrory, for example, noted that New Jersey is revisiting a “millionaire’s tax,” a higher tax rate bracket for those with significant earnings, similar to what California has. “Other states, equally impacted, may look for similar ways to tax those individuals making the most in order to not increase the burden on all taxpayers,” he said.

Timothy Speiss, a CPA and co-partner in charge of the personal wealth advisors practice at Top 100 Firm EisnerAmper in New York, said there’s no general worry about ramped-up audits but noted, “State tax residency and related sourcing of state income tax (by taxpayers) could be a state and local tax audit area, considering taxpayers relocating to other jurisdictions.” This could be particularly lucrative for jurisdictions as the pandemic forced widespread working from home.

Ultra-wealthy clients “are under an intensifying microscope under recent Treasury special projects and associated agent realignments. Auditing the W-2 middle class does not drive more revenue,” Morris said. “To shrink the tax-collection gap, the IRS and states must audit the wealthy because they’re the ones that have the ability and capacity to leverage the rules and regulations (for the extremely most party legally) in their favor.”


In fact, at a recent event, IRS representatives said that the service is planning to focus on high-net-worth taxpayers soon. (See story.)


Increased examinations of losses, deferrals (especially 1031 transactions), and cash and/or digital enterprises are continuing. “Nothing really new here,” Morris said, “except that as states seek increasing revenues, they must always return to the people and enterprises that earn them to squeeze more.”


The biggest initiatives may come from state capitals. “Given the magnitude of projected state budget shortfalls, the expectation is that states will have to legislate tax increases and make budget cuts rather than rely on increased audits and enforcement to cover such shortfalls in any meaningful way,” said David Shuster, a principal and international tax/director of tax controversy services in the New York offices of Top 100 Firm Friedman. “That could be state legislation, or it could be states piggybacking on federal legislation to which they conform, or some combination.”


That’s not to say that audits and enforcement will decrease. “On the contrary,” Shuster said, “they seem likely to end up continuing at least as much as before inasmuch as the return on such activity has historically justified the expense, and also because less enforcement typically leads to less voluntary compliance and, thus, greater shortfalls.”




IRS investigating fewer tax preparers

By Michael Cohn


The Internal Revenue Service’s Criminal Investigation unit has been initiating fewer investigations of abusive tax return preparers this past year, while also recommending fewer prosecutions, and seeing fewer indictments and prison sentences this year, according to a new report. However, the IRS CI division managed to identify $2.3 billion in other types of tax fraud schemes in the past year despite the challenges posed by the COVID-19 pandemic.


The report indicated that 140 investigations were initiated by IRS CI’s abusive return preparer program in the fiscal year ending Sept. 30, 2020, compared to 163 in fiscal year 2019 and 224 in fiscal 2018. Prosecution recommendations declined to 145 this year from 203 last year. Indictments and informations slipped to 128 this year from 138 last year and 170 in fiscal year 2018. The number of abusive return preparers sentenced fell to 112 in fiscal year 2020 compared to 154 in fiscal 2019. The average number of months of prison sentences for abusive preparers dipped to 21 months in fiscal year 2020, compared to 24 months in fiscal 2019 and 25 in fiscal 2018. The only metric for abusive return preparers where there was an uptick was in the incarceration rate, which increased to 80 percent in fiscal year 2020 from 78 percent in both fiscal 2019 and 2018.


“We have a significant return preparer program,” said IRS Criminal Investigation chief Jim Lee during a conference call Monday with reporters, in response to a question from Accounting Today. “When I talk to my special agents in charge around the country ... I’m stressing that they need to work the best and most significant investigations.”

He noted that the decline of 23 investigations this past year comes down to about one per field office and could be due to the training of new agents. The number of CI special agents increased by 1 percent in fiscal year 2020 to offset planned retirements.


“Some of that will have to do with new special agents in training because while they’re in training they’re not working cases, so some of that can be directly attributable to the number of agents we have,” said Lee. “We have a significant relationship with the IRS revolving around abusive return preparers, whether they’re individuals or businesses, so you might see a small downtick there, but what I would suggest is that our quality of cases is higher.”


As for the decline in prosecution recommendations and indictments, he pointed out that the IRS depends on the Justice Department to bring those cases, which have declined in part as a result of the COVID-19 pandemic this year. “Keep in mind that when we refer a case for prosecution, we investigate the case and refer it,” said Lee. “We make a recommendation for prosecution, but we need the Department of Justice to actually prosecute the case, and during the last half of the year, it’s been challenging because you had courts closed and you had grand juries that were not running, so some of that probably has to do with the pandemic. But overall, I don’t look at any one program. I look at them overall, and overall our tax program is strong.”


Despite the declines on the tax preparer enforcement side, the IRS CI report cited other achievements this year, despite the pandemic dominating much of the fiscal year, including the identification of over $10 billion in tax fraud and other financial crimes. Some of the main focuses this past fiscal year have included COVID-19 related fraud, cybercrimes (with an emphasis on virtual and cryptocurrencies), traditional tax investigations, international tax enforcement, employment tax, tax refund fraud and tax-related identity theft.


In response to COVID-19 related crimes, CI special agents adapted their investigative techniques this year to take on cases involving fraudulent claims for Economic Impact Payments, Paycheck Protection Program loans and refundable payroll tax credits from the CARES Act.


“Our mission and our highest priority continue to be enforcing our country’s tax laws,” said Lee. “The 2020 annual report highlights this. Specifically, on the key takeaways, it talks about how 73.1 percent of our time was spent on tax-related crimes, and this is significant.”


In fiscal year 2020, the IRS CI unit initiated 1,598 cases. CI also continued to increase its use of data analytics and strengthened its international partnerships to help identify the most impactful cases. One important partnership again this past year was the Joint Chiefs of Global Tax Enforcement (J5), an international committee composed of tax enforcement agencies from five different countries. In FY 2020 alone, they shared more information about cryptocurrency, tax crimes and related areas of enforcement than in the previous 10 years combined. CI also saw the first guilty pleas for a case brought under the J5 umbrella.


Enforcement is happening at the local level as well. Last Friday, the IRS announced it had busted an apparel company owner in New York City who allegedly diverted $4.4 million to third parties to pay for personal expenses for himself and his family. “When we talk about tax evasion, the reason why we’re in this job is to take care of the taxpayer and make sure that we protect the Treasury,” said IRS Criminal Investigation deputy chief Jim Robnett, who also spoke during the press conference call. “This is the kind of greed that we often see in cases that make them go from a civil matter to a criminal matter. That’s really what we’re in the business of investigating: those allegations that point to people doing things that are unlawful intentionally.”


As the sole federal law enforcement agency with jurisdiction over federal tax crimes, the CI division boasts a 90.4 percent conviction rate, one of the highest in federal law enforcement.


"The special agents and professional staff who make up Criminal Investigation continue to perform at an incredibly high-level year after year," said IRS Commissioner Chuck Rettig in a statement. "Even in the face of a global pandemic, the CI workforce initiated nearly 1,600 investigations and identified $2.3 billion in tax fraud schemes. This is no small feat during a challenging year, and their work is critical to protecting taxpayers and the integrity of our tax system."




RMD tables updated to reflect longer lives

By Jeff Stimpson


The tables used to compute required minimum distributions from retirement plans have been updated for 2022.


The new tables take effect as the Internal Revenue Service have issued revised regulations under IRC Sec. 401(a)(9) and can be used for calculations for distribution calendar years beginning Jan. 1, 2022.


They also generally reflect longer life expectancies. For example, a 72-year-old IRA owner who applied the Uniform Lifetime Table under formerly applicable Sec. 1.401(a)(9)-9 to calculate required minimum distributions used a life expectancy of 25.6 years. Applying the new tables, that life expectancy rises to 27.4.


These changes aim to reduce RMDs generally, allowing participants to retain larger amounts in their retirement plans longer.





Rough waters: Tax pros' financial advice for the next six months

By Jeff Stimpson


As the coronavirus pandemic grinds on, clients’ questions about their personal finances are starting to get frantic. What to tell them? According to the tax practitioners we spoke with, it depends on your circumstances, patience, and in some cases, a lot of hope from everybody involved.


First off: Advisors or not?

“I am very careful when discussing finances with clients, as I am not a financial advisor,” said Twila Midwood, an Enrolled Agent at Advanced Tax Centre, in Rockledge, Florida. “I caution my clients as such and let them know that I can only discuss their finances as it relates to either tax planning or, for business clients, their income/expense statements for business clients.”

Yet, “For many, we’re their only money counselor,” said Kerry Freeman, an EA at Freeman Income Tax Service in Anthem, Arizona. “We’re the only people they see yearly, and they share everything with us.”


Tapping nest eggs

“A lot of mortgage refinancing has started, and I’m getting many questions about deductible fees and interest after the 2017 changes,” Freeman said. “I also have to remind those on unemployment about withholding so they don’t put themselves in a bigger tax liability hole. There are those who only see today’s needs and are willing to let what comes, come later: often a tax debt with the IRS.” Individual taxpayers are asking about hardship distributions from 401(k)s and how to plan repayment or tax-payment strategies.

Ditto on the retirement account questions for Jeffrey Gentner, an EA in Amherst, New York. “Fortunately, a vast majority of my clients are professionals or retired. They haven’t been affected during the past six months like others who’ve been laid off,” he said.



This year, as in many before, Freeman’s firm reached out to clients with direct calls. “This year, many more are replying back with questions,” he said.

“Small businesses are asking about [Paycheck Protection Program] loans and [Economic Injury Disaster Loans] and how to spend their cash flow on equipment or savings,” Freeman said. “I also have those small businesses that often do work well in advance and are not paid till the completion of the service. One such client assisted in corporate meeting events — all now cancelled for 2020, and most of 2021 have all been canceled. Working that far ahead causes a feast-or-famine work environment. We’re talking about how to change these billing models and get some funding up front.”

“Still lots of questions regarding the PPP and EIDL loans,” said Terri Ryman, an EA at Southwest Tax & Accounting in Elkhart, Kansas. “I’ve helped clients get these loans, and in some cases, they’re a real life-saver.”


Not knowing the basics

 “Most people don’t have the means for investments or even the funds to cover a $400 emergency,” Freeman said. “I remember a client who had a $1 million plus W-2 [wages] from their employer and who still had a car repossessed and took a cancellation of debt that same year for $5,000. Taxpayer education on finance and money-handling is way below a standard [that] we should accept.”


Creative advice

Mary Kay Foss, a CPA in Walnut Creek, California, says she also isn’t considered a money counsellor by prep clients.

“I did give some advice to hard-up clients this filing season. For a client whose 2019 successful business was a bust in 2020 due to shelter-in-place, I suggested that she withdraw enough funds from her SEP to make a 2019 SEP contribution by Oct. 15,” Foss said. “She needed the deduction and qualified to treat the withdrawal as a coronavirus-related distribution that she could pay back over three years. I hate to recommend early distributions from a retirement plan, but this was a case where I felt her business could come back and she could return the money before the three years elapsed.”


Patience and lemonade

“On my mom-and-pop rental clients, I’m preparing this year’s return and telling them they can pay me next year or whenever,” said Bill Nemeth, executive director of the Georgia Association of Enrolled Agents. “Their renters stopped paying rent beginning with the April payments. I’m advising the taxpayers to request extended terms on their mortgages and insurance."

“I called my car insurer and asked for a COVID break,” Nemeth added, “and got [a] 15 percent reduction for the next three months just by asking.”


Accentuate the positive

“We anticipate that equity markets will stay somewhat volatile and, of course, the election may result in a change in our tax system. We’re not telling wealthy clients to invest any differently, but that perhaps they should prepare themselves for what might be a higher tax situation for them at the federal level,” said Bruce Primeau, a CPA and president at Summit Wealth Advocates, in Prior Lake, Minnesota. “Holding onto a bit more cash than usual may not be a bad idea, at least until we get into 2021.”

New IRS policy allows taxpayers with existing installment agreements to roll over any 2019 balance due to reinstate their installment agreements, Nemeth added. “Smart business,” he said, “since the IRS will collect more money while utilizing fewer resources.”




Catching a green wave

Fidelity's Clint Lawrence explains how some small cap companies may benefit from a heightened focus on environmental sustainability.



The future direction of climate policy from Washington remains uncertain but many companies, large and small alike, are likely to continue emphasizing the issues of climate change and sustainability. That emphasis is partly a response to investor demands, says Fidelity portfolio manager Clint Lawrence.


“There’s a sustained interest in ESG (environmental, social, and governance) efforts from investors and corporate executives know it,” says Lawrence, who is at the helm of Fidelity® Small Cap Value Fund (FISVX).


Lawrence believes small-cap companies that fit the “green” theme and meet his standards for value and quality could be in position to benefit from multiple trends, including continued investor focus on ESG characteristics and a possible investor rotation back into value stocks over time.


He’s looking for growing green-theme companies run by management teams he thinks are smartly allocating capital, generating free cash flow, and could expand operating margins in the coming years.


As of September 30, the fund’s holdings included Regal Beloit (RBC), a manufacturer of low-emission electric motors for heating, ventilation, and air conditioning systems; Owens Corning (OC), a manufacturer and distributor of various environmentally friendly building products; and Nomad Foods (NOMD), a producer of frozen foods that has a new line of meatless products.


Lawrence has also added some new companies to the fund this year, among them Renewable Energy Group (REGI), North America’s largest producer of biodiesels, or renewable fuel made from vegetable oils, animal fats, or restaurant grease; and Clearway Energy (CWEN), a utility company focused on renewable-energy generation (including wind and solar), primarily in California.

In this role, Mr. Lawrence is the portfolio manager of Fidelity Small Cap Value Fund and Fidelity Advisor Small Cap Value Fund. Prior to assuming his current role, he was an analyst on the equities small cap team responsible for covering financials.

Previously, Mr. Lawrence was an associate at Fenway Partners, a middle market private equity firm and a management consultant for the Monitor Group. During this time, Mr. Lawrence also acted as a private equity analyst for Monitor Clipper Partners. He has been in the financial industry since 2002.

Mr. Lawrence earned his bachelor of science degrees in finance and chemical engineering from the University of Pennsylvania and his masters of business administration degree from Harvard Business School.





Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


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