All taxpayers have the right to privacy – it’s the law
One of the IRS’s top priorities is protecting the privacy rights of America’s taxpayers. The agency takes this so seriously that the right to privacy is one of ten rights the Taxpayer Bill of Rights gives all taxpayers.
Taxpayers have the right to expect that any IRS inquiry, audit or enforcement action will comply with the law and be no more intrusive than necessary. Taxpayers can also expect that the IRS will respect all due process rights, including search and seizure protections and provide a collection due process hearing when appropriate.
Here are a few more details about what a taxpayer’s right to privacy means:
Income ranges for determining IRA eligibility change for 2021
WASHINGTON — The Internal Revenue Service announced cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2021 in Notice 2020-79, posted today on IRS.gov.
Highlights of changes for 2021
The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2021.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2021:
Key employee contribution limits remain unchanged
The limit on contributions by employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $19,500.
The catch-up contribution limit for employees aged 50 and over who participate in these plans remains unchanged at $6,500.
The limitation regarding SIMPLE retirement accounts remains unchanged at $13,500.
The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
When it comes to retirement planning, many people tend to focus on two things: opening a retirement savings account and then eventually drawing funds from it. However, there are other important aspects to truly doing everything you can to grow your nest egg.
One of them is celebrating your 50th birthday. This is because those age 50 or older on December 31 of any given year can start making “catch-up” contributions to their employer-sponsored retirement plans that year (assuming the plan allows them). These are additional contributions to certain accounts beyond the regular annual limits.
Maybe you haven’t yet saved as much for retirement as you’d like to. Or perhaps you’d just like to make the most of tax-advantaged savings opportunities. Whatever the case may be, now is a good time to get caught up on the 2020 catch-up contribution amounts because you might be able to increase your contributions for the year.
401(k)s and SIMPLEs
Under 401(k) limits for 2020, if you’re age 50 or older, you can contribute an extra $6,500 after you’ve reached the $19,500 maximum limit for all employees. That’s a total of $26,000.
If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $13,500 in 2020. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $16,500 in total for the year.
But be sure to check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.
If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the regular 2020 aggregate deferral limit of $19,500, plus a $6,500 catch-up contribution in 2020. But that’s just the employee salary deferral portion of the contribution.
You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation. The total combined employee-employer contribution is limited to $57,000, plus the $6,500 catch-up contribution.
Catch-up contributions to non-Roth accounts not only can enlarge your retirement nest egg, but also can reduce your 2020 tax liability, generally if made by Dec. 31, 2020.
Keep in mind that catch-up contributions are available for IRAs, too. The deadline for 2020 IRA contributions isn’t until April 15, 2021, but deductible contributions may be limited or unavailable based on your income and whether you (or your spouse) is covered by a retirement plan at work. Please contact us for more information.
If your company faces the need to “remediate” or clean up environmental contamination, the money you spend can be tax-deductible as ordinary and necessary business expenses. Unfortunately, every type of environmental cleanup expense cannot be currently deducted — some cleanup costs must be capitalized (spread over multiple years for tax purposes).
To lower your current year tax bill as much as possible, you’ll want to claim as many immediate income tax benefits as allowed for the expenses you incur. So, it’s a good idea to explore the tax impact of business property remediation before you embark on the project. If you’ve already done cleanup during 2020, review the costs closely before filing your 2020 tax return.
Deduct vs. capitalize
Generally, cleanup costs are currently deductible to the extent they cover “incidental repairs” — for example, encapsulating exposed asbestos insulation. Other deductible expenses may include the actual cleanup costs, as well as expenses for environmental studies, surveys and investigations, fees for consulting and environmental engineering, legal and professional fees, and environmental “audit” and monitoring costs.
You may also be able to currently claim tax deductions for cleaning up contamination that your business caused on your own property (for example, removing soil contaminated by dumping wastes from your own manufacturing processes and replacing it with clean soil) — if you acquired that property in an uncontaminated state.
On the other hand, remediation costs generally must be capitalized if the remediation:
In addition, you’ll likely need to capitalize the costs if the remediation makes up for depreciation, amortization or depletion that’s been claimed for tax purposes, or if it creates a separate capital asset that’s useful beyond the current tax year.
However, parts of these types of remediation costs may qualify for a current deduction. It depends on the facts and circumstances of your situation. For instance, in one case, the IRS required a taxpayer to capitalize the costs of surveying for contamination various sites that proved to be contaminated, but the agency allowed a current deduction for the costs of surveying the sites that proved to be uncontaminated.
Along with federal tax deductions, state or local tax incentives may be available for cleaning up contaminated property. The tax treatment for the expenses can be complex. If you have environmental cleanup expenses, we can help plan your efforts to maximize the deductions available
IRS resources to help small business owners
This week is National Veterans Small Business Week. The IRS has a variety of resources to help small business owners, including veterans, understand their tax responsibilities. Best of all, most of these resources are available online at IRS.gov.
Here’s a few webpages with helpful information for small business owners:
This page features links to useful tools and common IRS forms with instructions. Taxpayers can find help on topics such as starting or operating a business, recordkeeping, filing and paying taxes. A link to the IRS Tax Calendar for Businesses and Self-Employed also provides at-a-glance key tax dates for businesses.
This a great resource for sole proprietors and others who are in business for themselves. This site has many handy tips and references to tax rules a self-employed person may need to know. Self-employed taxpayers will find info on a variety of topics, including how to make quarterly payments and self-employed tax obligations.
For taxpayers engaged in the sharing economy, this site provides answers to tax questions, links to forms and resources related to the sharing economy. The gig economy—also called sharing economy or access economy—is activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website.
Reminder to all taxpayers: Gift cards are not used to make tax payments
Gift cards are a popular and convenient gift for all occasions. They’re also a tool that scammers use to steal money from people.
Scammers often target taxpayers by asking them to pay a fake tax bill with gift cards. They may also use a compromised email account to send emails requesting gift card purchases for friends, family or co-workers. The IRS reminds taxpayers gift cards are for gifts, not for making tax payments.
Here's how this scam usually happens:
Here's how taxpayers can tell if it’s really the IRS calling. The IRS will never:
Any taxpayer who thinks they've been targeted by a scammer should:
By Michael Cohn
The percentage of workers asking for compensation for work-from-home expenses with their employers hasn’t gone up significantly since the outbreak of the COVID-19 pandemic, according to a new survey, and women don’t feel they are being reimbursed fairly for their expenses as much as men.
The survey, by AppZen, a provider of expense-auditing software, found that women are less likely (59 percent) than men (80 percent) to feel fairly reimbursed for work-from-home-related expenses. In addition, while 75 percent of the 1,000 employees polled submitted work-from-home expenses during the pandemic, that wasn't much higher than the 69 percent of employees who submitted expenses pre-COVID. Only 51 percent of organizations have updated their expense policies as a result of COVID-19.
Besides differences between the perceptions of women and men with regard to reimbursement, the survey also found some lingering cultural differences at organizations. The C-suite and company executives are more likely to have company credit cards and expense accounts, while the majority of employees first have to pay for work-related expenses with their own money before they are reimbursed. While 49 percent of owners and partners used corporate credit cards and expense accounts, as well as 48 percent of C-level executives, only 32 percent of lower-paid staff had corporate credit cards and expense accounts.
Nevertheless, the volume of work-from-home expenses has been growing because of COVID-19. Claims for internet usage at home have risen 6 percent, and 46 percent of companies are reimbursing for internet charges during the pandemic.
On the other hand, there has been no increase in childcare claims as expenses, even though many schools have been closed and parents have been forced to do a form of home-schooling as their children study remotely with their local schools. Only 19 percent of the survey respondents said their employer fully considered childcare costs in reimbursing employee expenses. While 29 percent of the employees polled by AppZen feel they are fairly compensated for new types of work-from-home expenses such as childcare, 26 percent of the respondents said they feel uncomfortable about claiming work-from-home expenses.
“Right now it can be anything from snacks to a desk — it's all over the place,” said AppZen CEO Anant Kale. “Due to COVID, there's a wide range of what kinds of things employees are expensing — everything from masks to computer cables to new office furniture. Companies have to account for the differences in every employee.”
Those differences can include an individual employee’s work-from-home conditions, their family, as well as their own personal situation and point of view on their health needs. “In today’s work-from-home environment, there are far more variables to consider and be put into context,” said Kale. “Companies have to regroup and provide new ground rules to make sure employees remain safe and healthy in the workplace, wherever that may be.”
He believes that companies need to define the rules for what work-from-home expenses they will allow. “Setting clear expectations and guidelines around expenses is critical for fostering a healthy company culture,” said Kale. “Expense policies around what can and cannot be expensed are reflective of company culture as a whole. Building an atmosphere of trust, transparency and efficiency around expense reports helps contribute to a similar atmosphere throughout your organization.”
By Michael Cohn
The Internal Revenue Service plans to issue proposed regulations to allow partnerships and S corporations to exceed the $10,000 limit on state and local tax deductions imposed by the Tax Cuts and Jobs Act.
The IRS issued a notice Monday saying the proposed regulations would clarify that state and local income taxes imposed on and paid by a partnership or S corporation would be allowed as a deduction when figuring its “non-separately stated taxable income or loss for the taxable year of payment,” so they wouldn’t be subject to the state and local tax deduction limits for partners and shareholders who itemize deductions.
The upcoming proposed regulations would apply to these types of income taxes starting Monday, and would also enable taxpayers to apply the rules to specified income tax payments made in a taxable year of a partnership or an S corporation ending after Dec. 31, 2017, and before the date when the upcoming proposed rules are published in the Federal Register.
The announcement would effectively provide the IRS’s approval to the types of workarounds that some states such as Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island and Wisconsin have provided to businesses to circumvent the controversial $10,000 state and local tax deduction limitation in the 2017 tax overhaul, also known as the SALT cap. In these workarounds, businesses would pay the taxes at the entity level, as opposed to individually on the business owner’s or partner’s tax return, as is typical with pass-through businesses, and then would get a credit on their state tax returns, offsetting their individual tax liability. The Treasury Department has previously indicated that it would allow such workarounds, but hasn’t formalized its blessing.
“The Department of the Treasury and IRS are taking the necessary steps to provide fairness for America’s small businesses,” said Treasury Secretary Steven T. Mnuchin in a statement Monday. “These proposed regulations will offer clarity for individual owners of pass-through entities.”
Even as state and local officials worked overtime to count ballots in a few battleground states and finalize the presidential race, one result of the election seems fairly clear to tax experts: We shouldn’t expect much wide-ranging tax legislation coming out of Washington, D.C., in the near future.
While a few congressional elections still need to be decided, the expectation is that the House and Senate will remain divided.
“It’s fair to say that the ‘Blue Wave’ [of Democratic control of both the House and Senate] or whatever variation of it people were expecting, did not materialize — certainly not in the way the polls contemplated or the public may have expected,” explained Todd Metcalf, a principal in the national tax office of Big Four firm PwC, and former Democratic chief tax counsel for the Senate Finance Committee. “For example, going into Tuesday there was some expectation that Democrats might pick up seats in the House; at the moment it doesn’t look like that hasn’t happened, and they may even have lost a couple of net.”
“In a narrowly divided Senate, that constrains the latitude that an administration has, because whatever you’re trying to achieve, everyone has to agree with it,” he continued. “You can’t have any outliers. You have to find that centrist, consensus position. … If you have divided government for the next couple of years, regardless of who’s in the White House, you’re not going to see dramatic changes in tax policy.”
Bill Smith, managing director of the national tax office of Top 10 Firm CBIZ MHM, agreed: “Nothing is going to change after January 20 and what’s happened since the last midterm elections, in my opinion,” he said. “There is going to be no major tax legislation, although I think both sides want to pass a stimulus package.”
Room for change
A narrower scope for tax legislation doesn’t mean no tax legislation, however.
“Where you’re going to see changes, if at all, is where there’s significant bipartisan consensus,” said Metcalf.
As an example of potential areas for bipartisan consensus, Metcalf suggested R&D expensing, which is currently set to disappear in January 2022, due to a provision in the Tax Cuts and Jobs Act.
“I would expect to see a coming together around the notion that innovation, that research and development is good for the economy and good for jobs,” he said, noting that something similar happened when Congress included the R&D Credit in the PATH Act of 2015. “And so, more likely than not, you might see that change to that provision not take effect. Is it delayed permanently or is it delayed temporarily? It’s too soon to see something like that, but I do think that’s an area where you could see bipartisan common ground, and those are the areas where I’d expect to see potential changes to tax policy.”
He also noted the Child Tax Credit as an area of potential consensus, as well as the middle-class tax cuts in the TCJA, which are set to expire further down the road.
Congressional attempts to boost the economy are another area where tax changes might move forward.
“Both sides may try to stick various tax measures into the stimulus package,” said Smith. “The most likely are probably the extenders. Those are really kind of broadly based. There is probably bipartisan support for extending the extender provisions.”
As an example of a potential stimulus-related tax change, Metcalf noted that how much interest companies are able to deduct is set to decrease in January 2022 per the TCJA. “In the CARES Act, that was an area where they thought, ‘Companies that are struggling will need to take on more debt during a slowdown; we need to anticipate that and provide room for that,’” he said. As a result, the act increased the limit for the 2019 and 2020 tax years, so Congress might be open to further expansion of the deduction.
“Look for where there’s been bipartisan agreement in the past, and look for that to signal a policy direction going forward,” he said. “There is no partisan interest in prolonging a recession or not dealing with the economic situation that we see.”
Prior to the presidential election, one of the year-end focuses for tax planning was on a possible presidential victory for Joe Biden combined with a Democratic majority in the Senate that might result in tax increases in 2021 for higher-income individuals, corporations, investors, and estates. Biden has now been declared the victor of the presidential election. However, it appears possible that the Republicans may retain control of the Senate, and the issue may not be decided until two run-off elections in Georgia in January 2021. So control of the Senate may not be decided before year-end, making year-end planning based on the election results still something of a guessing game.
Planning for a Republican Senate
The possibility of a continued split government means that President-elect Biden may have difficulty getting his tax plans enacted into law. The stock market has been heading higher since the election, with investors betting on that result. One caution on that euphoria is that even the Republican Senate may feel the need at some point to address the growing federal deficit that has come about as a result of the tax cuts in the Tax Cuts and Jobs Act and the pandemic relief provided in the CARES Act. In addition, it is possible that additional pandemic relief might be enacted either in the lame duck session this year or early in 2021.
With less concern about significant tax increases early in 2021, the year-end tax planning focus can return to some of the more traditional strategies. Assuming that individual tax rates are not expected to increase in 2021, individual taxpayers can focus on the usual strategies of postponing income and accelerating deductions. Strategies to postpone income start with checking current projected income for 2020 and 2021, checking how that income might fall into the individual tax brackets, and determining if the taxpayer might be pushed into a higher bracket. While many wage earners and salaried employees may have limited control over the timing of their income, self-employed individuals may be able to postpone income by postponing billing, and employees expecting year-end bonuses may be able to negotiate to have those bonuses paid in 2021 rather than 2020. Corporations may similarly be able to postpone income into 2021 with less fear of a corporate rate hike in 2021.
The corollary to postponing income into 2021 is accelerating deductions into 2020. With higher standard deduction amounts, a bunching strategy for itemized deductions may be even more important, taking the standard deduction every other year and bunching itemized deductions such as charitable contributions or perhaps medical deductions into the off year for the standard deduction. This year may be a good year to bunch itemized deductions with higher limits on charitable contributions and a lower 7.5 percent threshold for medical expenses only available for 2020, although it may be getting a little late in the year to squeeze in some elective surgery. Non-itemizers can look to the $300 above-the-line charitable contribution, also under current law only available in 2020. There are also over 30 regularly expiring provisions currently expiring at the end of 2020, with the individual provisions including the tuition and fees deduction, the mortgage insurance premium deduction, the exclusion for mortgage debt forgiveness, the nonbusiness energy property credit, and a couple of vehicle credits.
Investors with less concern about a capital gain rate increase in 2021 may be able to focus on the usual year-end strategy of looking over their investment portfolio for holdings they might wish to sell and see how their capital gains and losses for the year match up in deciding whether to do the sale in 2020 or 2021. Capital gains realized might be subject not only to the capital gain tax rates but also the 3.8 percent tax on net investment income.
With less concern about increased tax rates in 2021, individuals may be less concerned about getting Roth IRA conversions done this year. However, retirement planning should continue to focus on changes to the new distribution rules for IRA beneficiaries and the ability to continue to make IRA contributions after age 70 ½ if there is enough earned income to support them.
Estate and gift planning also may require less of a year-end focus with less risk of a reduction in the unified credit in 2021 or an increase in estate and gift tax rates in 2021. However, low interest rates may make a year-end gifting program still attractive, although low interest rates are also expected to continue into 2021.
Planning for a Democratic Senate
At the point of this writing, the elections have so far produced an even 48-48 split in the Senate with Alaska and North Carolina undecided but leaning Republican and two races in Georgia scheduled for run-offs in January, 2021. Should both Democrats win in the run-off elections, the result could create a 50-50 tie in the Senate if the Republicans have held onto the other two undecided races.
This creates a scenario in which President-elect Biden may have a greater chance of enacting his proposed tax increases in 2021, including higher individual tax rates for taxpayers earning over $400,000, higher capital gains tax rates on higher income taxpayers, a higher corporate tax rate, and possible higher estate and gift tax rates and reduced exemption amounts. It may still be possible to plan for such contingencies in 2021 before they take effect but there is no guarantee of that at this point. While Congress frequently makes tax breaks retroactive, it has been more reluctant to do so with tax increases. Sometimes Congress has made tax increases retroactive at least to the beginning of the year when it feels that the intention to enact the tax increases has been made evident ahead of time.
Taxpayers who are concerned about tax increases in 2021 might change the normal year-end tax strategies. This would include accelerating income and postponing deductions for both individuals and corporations, taking a harder look at realizing capital gains in 2020, considering Roth conversions in 2020, and looking at making lifetime gifts in 2020. Again, there might be a window to take such actions in 2021 before tax increases would take effect, but that is not a certainty.
Biden has won the presidency, but whether the Democrats control the Senate will not be known for sure until 2021. President-elect Biden’s tax proposals may not be enacted without Democratic control of the Senate, but history indicates that new presidents often are successful in enacting their tax proposals early in their presidency if their party also controls Congress. Post-election tax planning for possible tax increases in 2021 therefore requires gazing into your crystal ball and planning accordingly.
Sotheby’s was accused by New York’s attorney general of helping a wealthy shipping company owner avoid paying income taxes on artwork he purchased from the auction house.
Sotheby’s allowed $27 million of art to be purchased tax-free by Porsal Equities, which is controlled by the shipping company owner, even though the auction house knew the client wasn’t an art dealer but was instead a collector buying for his personal use, the state said in a lawsuit filed Friday. Only dealers planning to resell art qualify for exemptions to city and state sales tax, the state said.
“Millionaires and billionaires cannot be allowed to evade taxes while everyday Americans pay their fair share,” New York Attorney General Letitia James said in a statement. “Sotheby’s violated the law and fleeced New York taxpayers out of millions just to boost its own sales.”
The complaint alleges that Sotheby’s violated the New York False Claims Act by facilitating the creation and use of false tax-exemption certificates. The claim is linked to an earlier probe of Porsal Equities that led to a $10.75 million settlement, the state said.
“Sotheby’s vigorously refutes the unfounded allegations made by the attorney general, which are unsupported by both fact and law,” the auction house said in an emailed statement. “This is an issue between the taxpayer and the state dating from between five and 10 years ago, which, as the attorney general noted in her complaint, was settled two years ago.”
The owner of Porsal Equities, a holding company incorporated in the British Virgin Islands, bought 35 pieces of artwork and furniture from 2010 to 2015, submitting false resale certificates to Sotheby’s, according to the court papers. Porsal is owned by a collector who has residences in New York City, as well as others around the world, the state said.
In 2018, the attorney general’s office reached a $10.75 million settlement with Porsal Equities for tax fraud in connection with more than $50 million of artwork and other goods purchased in New York from prominent art institutions. Porsal Equities couldn’t be immediately reached for comment on the lawsuit.
As part of that probe, Porsal Equities admitted it and its owner certified that they were purchasing artwork for resale when, in reality, they did it for display and enjoyment at the collector’s private residence, the state said.
GoFundMe was launched in May 2010 in an effort to create a platform for individuals to fund their personal causes. Although there were several other crowdfunding platforms available at the time, the existing platforms focused mainly on funding for the creation of businesses or tangible products. Unlike its predecessors, GoFundMe focused on making financing available for personal needs, such as medical expenses and tuition. This focus on individual causes has contributed to GoFundMe becoming the largest crowdfunding platform on the internet. The ability to contribute directly to people in need, as opposed to their business products, has also caused confusion around the deductibility of such amounts as charitable contributions.
GoFundMe operates as an administrative platform, essentially acting as the middleman between individuals needing financial assistance and the donors who are willing to help. It enables individuals in need to establish their own campaigns to fundraise for their personal causes. They can create their own websites, upload photos and videos, and then share the website through email and various social media platforms. Other individuals may then use the platform to donate to the campaigns of their choice. GoFundMe is not a broker, financial institution or 501(c)(3) charitable organization. It merely facilitates the means for individuals to receive funds from unrelated donors.
On GoFundMe, you can raise money for an individual, a group of individuals or an organization. There are also two different types of campaigns available: a standard GoFundMe campaign or a “Certified Charity” campaign. With a standard GoFundMe campaign, most organizers are individuals, and they can withdraw the funds raised for their cause and deposit them in their own personal bank accounts however frequently they choose. Donations made towards standard GoFundMe campaigns are generally not eligible as a tax deduction as they are given to individuals and not registered charities.
Certified Charity campaigns raise money for a 501(c)(3) or other registered charity. Unlike with a standard GoFundMe campaign, the funds raised are not collected by the campaign organizers, but rather they are distributed directly to the certified charity through the use of PayPal Giving Fund. In order to create a certified charity campaign, the charity’s name or Employer Identification Number needs to be provided to GoFundMe. Only donations made towards a Certified Charity campaign are considered to be tax-deductible and will be issued tax receipts at year’s end by PayPal Giving Fund.
The IRS gets interested
Since its inception, GoFundMe has facilitated over 120 million donations, for a total of over $9 billion in funding. This amount of money being exchanged is bound to grab the attention of the Internal Revenue Service. Surprisingly, there has been very little guidance issued by Congress or the IRS in relation to crowdfunding.
This lack of guidance has caused quite a bit of disparity for both donors and donees when it comes to the tax reporting of GoFundMe transactions.
GoFundMe, being merely the administrative platform, will not report donations as income or issue any tax documents to donors or donees. Generally, the funds raised through GoFundMe are processed by a third-party organization, such as PayPal. Per IRS requirements, the third-party payment network must issue a Form 1099-K when the aggregate number of transactions exceeds 200 and the total value exceeds $20,000. Although reported on Form 1099-K, these amounts are generally considered personal gifts and would be excludable from a taxpayer’s gross income.
In order to determine proper tax treatment for both the contribution and the receipt of funds, one must look back to existing tax law. What is important to note for donees is that anything reported to the IRS on a 1099 will likely lead to a matching notice if not properly reported by the recipient. For example, a woman in Omaha received an approximately $19,000 tax bill from the IRS a year after she raised $50,000 on GoFundMe. The woman claimed that all funds she received were non-taxable gifts, and that she used the expenses for her medical treatments after a car crash. Even if this is true, she is now in a lengthy dispute with the IRS to prove it. Although donations received from GoFundMe campaigns are generally not taxable to the recipients, if the IRS issues a notice relating to those funds, the burden of proof then falls on the taxpayer. To get ahead of any issues with the IRS, recipients should report all GoFundMe proceeds as “Other Income,” and then separately show a reduction of that amount along with an explanation.
Crowdfunding contributions fall into a very gray tax area, and one of the only sources of IRS guidance is Private Letter Ruling 2016-0036. In this ruling, the IRS provides that a gift arises from "detached generosity” and contains no "quid pro quo.” It continues to state, however, that a voluntary transfer without a ”quid pro quo” is not necessarily a gift for federal tax purposes. Therefore, even this letter ruling does not offer much guidance for taxpayers and tax professionals. The conclusion to be drawn from this private letter ruling is that the tax treatment of any crowdfunding income and deductions can only be determined after careful evaluation of the specific facts and circumstances.
Although the majority of contributions made through GoFundMe are below the gift tax threshold, there are scenarios in which individuals are contributing significant amounts of money. In these cases, it is important to keep in mind the IRS reporting requirements for gifts. Donors who contribute more than the yearly gift exclusion amount to an individual ($15,000 for single taxpayers and $30,000 for married taxpayers filing jointly for the 2020 tax year) should ensure that they are filing the required gift tax return. There are exceptions to the gift tax requirement when amounts are paid for medical and educational expenses. However, the exception only applies when the money is contributed directly to the qualified medical or educational institution. Although education and medical expenses are two of the most common causes for GoFundMe donations, the money rarely goes directly to the qualified institution.
Recent changes in tax law have significantly reduced the amount of expenses that individual taxpayers are eligible to claim as deductions. Charitable contributions remain one of the few important deductions that can help significantly decrease federal liability. Therefore, it is essential to understand that not all money contributed to a personal cause, no matter how charitable it may seem, is deductible in the eyes of the IRS. With the continued rise of social media and the ability to connect with strangers virtually, the use of GoFundMe and other crowdfunding platforms is expected to increase.
As funding continues to grow, the IRS will likely pay more attention and increase reporting requirements for these transactions. Until further guidance is issued, it is important for taxpayers to maintain records of their crowdfunding contributions and receipts and consult with their tax professionals on the implications.
Democrats’ failure to secure a Senate majority in last week’s election has heightened the importance of Tuesday’s Supreme Court showdown over the Affordable Care Act, increasing the chances the court will get the final word on a law that provides health insurance to 20 million people.
President Donald Trump’s administration is joining Republican-led states in challenging the law, known as Obamacare, which the GOP has been trying to wipe out since it was enacted in 2010. They’re banking on the court’s strengthened conservative majority with new Justice Amy Coney Barrett.
With health care accounting for a sixth of the U.S. economy, the stakes were massive even before the election made Democrat Joe Biden the president-elect while leaving Republicans favored to retain control of the Senate. Now the prospect of a divided government could leave Democrats without the ability to override a ruling invalidating the law.
“If Biden had won the presidency and Democrats had taken the Senate, there was a good chance that Democrats would adopt a fix to put the Affordable Care Act back on its feet,” said Nicholas Bagley, a health-law expert who teaches at the University of Michigan Law School. “But that kind of fix is really off the table if Republicans control the Senate.”
Advocates for patients, doctors, hospitals and insurance companies are urging the court to uphold the law, warning of chaos should the measure be invalidated in the midst of a pandemic. The challenge jeopardizes the health care of more than 135 million Americans with pre-existing conditions, including those who have had COVID-19, according to estimates from the liberal Center for American Progress.
“If the Supreme Court invalidates the entire ACA, and the Democrats do not take the Senate, it absolutely imperils the health and economic well-being of millions of Americans,” said Jaime Santos, a Washington lawyer who filed a brief on behalf of more than 80 advocacy groups, led by the National Women’s Law Center.
Control of the Senate is likely to depend on two Jan. 5 runoffs in Georgia. After Tuesday’s election the Senate stands at 48-48, with Republicans leading as yet uncalled races in North Carolina and Alaska.
Unless Democrats win both Georgia races, Biden could see his health-care agenda stymied by a narrow Republican majority in the Senate. Republicans got more votes than Democrats in both races last week, but no candidate received the necessary majority to avoid the runoff.
Roberts and Kavanaugh
The Supreme Court fight centers on the ACA’s so-called individual mandate to acquire insurance. The Supreme Court upheld the provision in 2012 when Chief Justice John Roberts said it was a legitimate use of Congress’s taxing power, because it included a penalty on people who lacked policies.
When Republicans took control of Congress and the White House in 2017, they zeroed-out the tax penalty, leaving the mandate with no practical consequences. The Trump administration and states led by Texas now say the mandate must be struck down because it no longer qualifies as a tax.
And they say the mandate is so integral to the law, even without any penalty, the rest of the ACA can’t stand without it.
That argument could face an uphill fight, even with the court’s 6-3 conservative majority. Roberts and Justice Brett Kavanaugh have expressed reluctance to toss out an entire statute just because one part is unconstitutional. In a ruling this year on the federal robocall ban, Kavanaugh said the court should “sever” the unconstitutional provision as long as the rest of the statute can fully operate on its own.
“Constitutional litigation is not a game of gotcha against Congress, where litigants can ride a discrete constitutional flaw in a statute to take down the whole, otherwise constitutional statute,” Kavanaugh wrote.
Roberts has twice voted to uphold core parts of the law, in 2012 and in a 2015 ruling that backed crucial tax credits in the law.
Nor is Barrett a sure bet to void the entire law, although she has criticized Roberts’s reasoning in the previous rulings. At her Senate confirmation hearing last month, Barrett said that “the presumption is always in favor of severability.”
The Affordable Care Act, signed into law by President Barack Obama, was a sweeping health-care overhaul. It expanded the Medicaid program for the poor, provided consumers with subsidies, created marketplaces to shop for insurance policies, required insurers to cover people with pre-existing conditions, and let children stay on their parents’ policies until age 26.
Even some who oppose Obamacare say it would be a stretch for the court to strike it down. Michael Cannon, director of health policy studies at the libertarian Cato Institute, says the lawsuit is meritless because the 18 states and two people challenging the law haven’t suffered any injury that gives them a right to sue.
Cannon said he views the law as unconstitutional and would like to see it invalidated. “But you don’t throw out the rulebook in order to do that,” he said. “The goal here is not just to have a win on health policy or to spite John Roberts.”
With the Trump administration refusing to defend the law, that task has fallen to the Democratic-controlled House and 20 states, led by California. Their list of supporters includes all 47 Democratic and independent U.S. senators.
In contrast, not a single Republican member of Congress filed a brief backing the Texas-led challenge.
“It’s not just that they are not supporting it, they are opposing it because it’s politically harmful,” said Josh Blackman, a constitutional law professor at the South Texas College of Law in Houston. “No one wants the ACA killed at this point.”
Blackman, who supports the litigation challenging the law and wrote a book on the 2012 case, says he doubts there will be any votes on the Supreme Court to strike it down entirely.
Whatever the chances the law will be invalidated, they rose when Barrett replaced the late Justice Ruth Bader Ginsburg, who was one of two justices to back every aspect of the law in 2012. Ginsburg’s death on Sept. 18 meant the court no longer had all five justices who voted to uphold the individual mandate in 2012.
Even a small chance the law would fall has supporters nervous.
“I don’t think the Supreme Court is going to pull the trigger here, but I can’t tell you that for sure,” Bagley said. “It would be such a calamity if it did. And I say that, independent of whether you support or oppose the Affordable Care Act. Just the chaos that a decision like that would sow is something that we normally try to avoid.”
The case is California v. Texas, 19-840.
President-elect Joe Biden has pledged to repeal President Donald Trump‘s tax cuts as soon as he is inaugurated, but the ongoing financial crisis and the prospect of a Republican-controlled Senate could waylay that proposal for the foreseeable future.
Biden will likely soon send a deficit-financed economic recovery bill to Congress, delaying any progress on a tax-increase plan for at least a couple of months, despite his pledge to work to reverse the tax cuts on day one of his presidency.
Biden would find a receptive audience for his plans in the House. But if Republicans continue to control the Senate — which depends on the outcome of January runoffs for both Georgia seats — they have the power to block his tax agenda.
In the months before the election, Congress failed to reach agreement on stimulus legislation to combat the economic effects of the ongoing coronavirus health crisis. Wall Street and corporate accountants fear that having Biden in the White House will mean significantly higher taxes. But there’s skepticism that any changes could pass either chamber in the foreseeable future with an economy still hobbled by the outbreak.
“Any president will have a difficult time raising taxes right away in the middle of a pandemic,” said George Mateyo, chief investment officer at Key Private Bank. “I don’t want people to overreact. I think they may be delayed.”
A Republican-controlled Senate would be Biden’s biggest roadblock to passing any tax increases. Republicans, many of whom have signed Americans for Tax Reform’s pledge to oppose tax hikes, are also eager to defend Trump’s tax cut, which they say is his key legislative achievement.
A client of mine recently asked me what I thought was the best organizational structure for a small business, all things considered, especially related to the tax issues. So, I put together a list of advantages and disadvantages of all four entity types that I thought were most relevant. They are C corporations, S corporations, single member LLCs and multi-member LLCs.
I immediately excluded sole proprietorships and partnerships because these entity types do not protect a business owner’s personal assets from business liability, and the owner or owners personally assume the liability of both types.
I believe based on my analysis that S corporations are the best option for almost any small business. Let’s compare the advantages and disadvantages of S corporations.
Of course, the shareholders’ tax brackets and effective tax rate are important. An effective tax rate is the actual rate a taxpayer pays, calculated by dividing total tax by taxable income. A marginal tax rate is the rate at which the next dollar of income is taxed. I wouldn’t consider the marginal tax rate. The top tax rate is important. While the top tax rate is a flat 21 percent for C corporations and personal service corporations, the top rate for shareholders of an S corporation is 37 percent, but it is a graduated rate, so I believe the effective tax rate must be considered.
Another issue that must be considered for this analysis is that it appears most likely that we will have a new presidential administration next year, and some of the benefits of any entity type may very well disappear. That complicates tax-planning matters, but not entirely.
There are issues related to the recognition of income, the deduction of expenses and tax credits that should be considered, but many of these are the same for every business type. Note that I did not include the tax provisions of the CARES Act and the Families First Coronavirus Relief Act below because many of those issues are temporary. The tax credits in each, and the deferral of payroll taxes, apply to all entities.
Some advantages of an S corp are:
1. Shareholders are not subject to double taxation on income in retained earnings.
2. The income and loss of the S corp are allocated pro rata on a daily basis to each shareholder based on their ownership of all the shares of an S corp.
3. Capital losses are also allocated to the shareholders based on their daily pro rata share of total shares in the S corp.
4. An S corp is not subject to Social Security and Medicare taxes on pass-through income because it is not “self-employment income.”
5. An S corp can pay its shareholders a reasonable salary and only be taxed for Social Security and Medicare purposes on that salary, and not on the distributive allocation. The best source of information to determine the reasonable salary is the government’s own Bureau of Labor Statistics, but the IRS doesn’t normally get concerned about this unless the compensation is zero or very little.
6. The corporation can have an unlimited life and shares can be transferred easily to other people or entities.
7. Shareholders get the maximum protection for their personal assets if they keep their business affairs completely separate from their personal affairs. The courts can pierce the veil of a corporate entity if business affairs are not kept separate from personal affairs.
8. S corps are not subject to the Net Investment Income tax.
9. Fringe benefits for employees and owners of 2 percent or less of the S corp are not considered income for the shareholder or employee. They are also deductible by the S corp.
10. A greater than 2 percent owner of an S corp can deduct 100 percent of health care premiums paid by the corporation under a plan established by the corporation.
11. An S corp is eligible for the 20 percent Section 199A deduction on qualified business income, except as disallowed by law generally for certain service corporations.
12. A shareholder has basis in certain debts of the S corp to the shareholder, to be adjusted over time.
13. No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, the people who are in control (as defined in section 368(c)) of the corporation. Section 368(c) defines control to mean the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. Other property received, called boot, is taxable in the transaction.
14. A shareholder can include loans the shareholder made to the S corp in basis, but not liabilities to outside persons or entities.
Some disadvantages of an S corp are:
1. It can only have 100 shareholders. A husband and wife are one shareholder but become two shareholders if they divorce.
2. It cannot have nonresident aliens as shareholders.
3. Shareholders must be individuals and certain trusts.
4. Partnerships, C corporations and multi-member LLCs cannot be shareholders.
5. It can generally only have one class of stock.
6. State tax law may not recognize an S corp.
7. A shareholder cannot include debt in their basis of the entity for debt to outside parties.
8. An S corp with more than 100 employees earning at least $5,000 in the prior year cannot claim the pension plan startup costs credit.
9. Shareholders in an S corp may be subject to the tax on income items related to their investments in the corporation.
10. There are restrictions on the ordinary income treatment on Section 1244 qualified small business stock.
11. Owner-employees who own more than 2 percent of the S corp stock may have to include fringe benefits in their gross income.
12. An S corp that is not a closely held corporation must use the “simplified look-back” method of accounting for long-term contracts if almost all of its income under a long term contract is from sources in the United States.
13. There are limitations on some deductions that are generally itemized deductions of shareholders and certain other expenses such as alimony.
14. Distributions to shareholders may be taxable if they exceed the AAA account first, earnings and profits second, and then the remaining basis in stock.
15. S corps must generally use a calendar year for reporting profits and losses, but may apply for a fiscal year from the IRS for business purposes, or it can elect a Section 444 tax year.
16. An S corp must make a proportionate allocation and distribution based on ownership interest.
17. A deduction for health insurance benefits is not allowed in excess of the earned income of the owner-employee from that business.
18. An S corp can have “built-in gains” if it does not become an S corp in its first year. Built-in gains are gains that are embedded in an S corp’s assets before it became an S corp. The gains on assets in this case are frozen and are then taxable to the S corp at the applicable corporate rate when they are sold. The gain or loss on “built-in gains or losses” is allocated to all shareholders on a pro rata basis, even when the property creating the “built-in gain or loss” was contributed by one shareholder, or several specific shareholders.
19. The “at-risk” rules apply to S corporations and this is applied at the shareholder level Shareholders cannot deduct losses unless they are at risk of losing property or paying a liability in the amount of the loss. Shareholders of an S corp cannot be liable for non-recourse debt.
20. The passive activity rules also apply at the shareholder level, but certain determinations related to a passive activity must be made at the corporate level.
21. An S corp can only claim a deduction for stock given to an employee for services in the amount and the year the employee includes the stock in income. This generally occurs when the stock vests in the employee and the amount of income is the difference between the amount the employee paid for the stock and its fair market value at the date the employee vests in the stock.
The IRS is warning of a new text scam created by thieves that tricks people into disclosing bank account information under the guise of receiving their $1,200 Economic Impact Payment.
The scam message states, “You have received a direct deposit of $1,200 from COVID-19 TREAS FUND. Further action is required to accept this payment into your account. Continue here to accept this payment … .” The text includes a link to a fake web address, warned the IRS and its partners in the Security Summit, including state tax agencies and the tax industry.
This fake phishing URL, which appears to come from a state agency or relief organization, takes recipients to a fraudulent website that impersonates the IRS.gov "Get My Payment" website. Victims enter personal and financial account information that scammers then harvest.
Neither the IRS nor state agencies texts taxpayers asking for bank account information so that an EIP deposit may be made.
“This scam is a new twist on those we’ve been seeing much of this year,” said IRS Commissioner Chuck Rettig.
People who receive the text scam should take a screenshot of the text message and include the screenshot in an email to firstname.lastname@example.org, along with the date, time and time zone that they received the message; the number that appeared on their Caller ID; and the number that received the text message.
“Catastrophe” they say, and “Disaster waiting to happen” as the time eventually nears to file 2020 taxes.
The pandemic has sent legions of workers — and tax clients — nationwide to a work location other than their business. These remote workers are now beginning to wonder if they’ll have to pay income tax to more than one jurisdiction and how long it will take to get such a mess eventually cleared up.
Good question, say some preparers. States use several factors to decide whether a taxpayer must include income for taxing in that state, including nexus, domicile and residency. Some hold reciprocal tax agreements with neighboring states and others have actually begun issuing nexus guidance and relief measures. Next year’s W-2s may not look like any in recent memory, as many states take a stab at withholding.
“Thankfully, in the D.C. Metro area we already have interstate agreements where payroll withholding is based on state of residency and people are able to cross state borders for employment without tax implication,” said Lori Roberts, a CPA and director of state and local taxation for Top 100 Firm PBMares in Fairfax, Virginia. “But this only protects employees and their W-2 earnings. We are cautioning clients that they will need to work within state tax laws to determine nexus triggers for their business activities.”
“My clients working from home are being advised to exercise patience — and hope that their taxing authority [refrains] from exercising nexus statutes,” added Enrolled Agent John Dundon, president of Taxpayer Advocacy Services in Englewood, Colorado.
Absent real state legislation or clear guidance (“scarce and inconsistent,” as one CPA described it), employees working from home could trip nexus in the employees’ state of residency for the employer, potentially requiring the employer to file and pay tax in additional states, according to Roberts at PBMares.
No hopping off
The filing situation ahead will be complicated not only by a mish-mash of states’ rules regarding nexus but by companies slowly reopening and sending workers back to offices on scattered schedules to ensure social distancing.
“Once nexus is created with a state, the taxpayer will likely need to register to do business in that state and will be subject to the various state tax return filing requirements,” reads a recent “Tax Warrior” blog from the Philadelphia firm Drucker & Scaccetti. “Each state has different nexus standards and within a state there may be different standards for different types of tax … An employee working in a state typically creates nexus for the employer in that state for both sales tax and income tax.”
PBMares’ Roberts also reports inquiries about people working from their vacation homes. “Such situations could impact not only the employer but the employee, as they will have taxable income in their home state and their vacation home state,” she said.
“Taxpayers shouldn’t think that they can hop off to their second home in a state with no individual income tax and think they can assume part-year residency in their state of domicile and avoid state tax. The home state will presume that all income is taxable in the state of residency/domicile, and only if income is double-taxed to another state will the taxpayer be able to receive benefit in their home state through other state credits,” Roberts said.
“Even if an employee is working in a state that has issued a ‘nexus waiver’ during the pandemic, that waiver may only be valid during a government-mandated shutdown. As businesses reopen, a nexus waiver may no longer apply,” the “Warrior” blog adds.
Location, location, location
“The Tax Warrior” advises all businesses to revisit teleworking policies and consider:
Solid documentation is another wise defense — including correcting employees’ addresses of record to reflect working from home — as is ensuring adequate withholding for the correct state.
By Michael Cohn
The Internal Revenue Service is making some changes in its collection program to lessen the burden on taxpayers who owe outstanding tax debts and are trying to cope with the economic fallout of the COVID-19 pandemic.
The IRS said Monday that it’s making it easier to set up payment agreements and offers in compromise as part of a new Taxpayer Relief Initiative.
“The IRS understands that many taxpayers face challenges, and we’re working hard to help people facing issues paying their tax bills,” said IRS Commissioner Chuck Rettig in a statement. “Following up on our People First Initiative earlier this year, this next phase of our efforts will help with further taxpayer relief efforts.”
Darren Guillot, the IRS Small Business/Self-Employed deputy commissioner for collection and operations support, discussed the new relief options in a new edition of the new IRS blog, “A Closer Look.”
“Earlier this year, we provided extensive relief and temporarily adjusted our processes to help people and businesses through our People First Initiative, which was in effect for the first months of COVID,” he wrote. “While it’s been important for us, and for the nation, to resume our critical tax compliance responsibilities, we continue to assess the wide-ranging impacts of COVID-19 and other difficulties people are experiencing.”
Under the new Taxpayer Relief Initiative, the IRS is offering several new forms of relief:
The IRS offers options for short-term and long-term payment plans, including installment agreements via the Online Payment Agreement system. The service is mainly available to people who owe $50,000 or less in combined income tax, penalties and interest, or to businesses that owe $25,000 or less combined that have filed all tax returns. The short-term payment plans can now be extended from 120 to 180 days for certain taxpayers.
The IRS has expanded its installment agreement options to get rid of the requirement for financial statements and substantiation in more circumstances for balances owed up to $250,000 if the monthly payment proposal is sufficient. The IRS also modified its installment agreement procedures to further limit the requirements for federal tax lien determinations for some taxpayers who only owe outstanding taxes for last year.
In addition to payment plans and installment agreements, taxpayers can also contact the IRS to ask for a temporary delay of the collection process. If the IRS decides a taxpayer is unable to pay, it can delay collection until the taxpayer's financial condition improves.
The IRS is now offering extra flexibility for some taxpayers who temporarily can’t meet the payment terms of an accepted offer in compromise.
To provide relief from tax penalties, the IRS is highlighting reasonable cause assistance for taxpayers with failure to file, pay and deposit penalties. First-time penalty abatement relief is also available for the first time a taxpayer is subject to one or more of these tax penalties.
Many taxpayers can apply through IRS.gov for some forms of relief, including installment agreements, without ever having to talk to a representative.
Other requests, including the new flexibility offered under the Taxpayer Relief Initiative, can be made by contacting the number on the taxpayer’s notice or responding in writing. However, when they ask for relief, the IRS said taxpayers need to be responsive when they receive a balance-due notice.
“If you’re having a tax issue, don’t go silent,” Guillot said in a statement. “Please don’t ignore the notice arriving in your mailbox. These problems don’t get better with time. We understand tax issues and know that dealing with the IRS can be intimidating, but our employees really are here to help.”
Election Day often brings out the wanderlust in people dissatisfied with the results; the 2020 election is no different. After a tough year, Americans are once again looking into living abroad.
There are currently 9 million U.S. expats living all over the world, a number that stands to grow after this election season as online searches on expat life surge 300 percent above the average. With rising coronavirus numbers in the U.S., combined with the new flexibility offered by remote work, Americans are more inclined than ever to give expat life a try.
While living abroad brings a new lifestyle and a rush of opportunities, it’s important to do the proper research, and consider the logistics and the tax consequences of living abroad, according to Katelyn Minott, a CPA, managing partner of Bright!Tax and currently a resident of Rio de Janeiro.
“The pandemic has created a situation in which many are finding they can work from wherever their computer might be,” she said. “And it’s created a global business environment that allows people to travel and follow their heart’s desire to live abroad. But beyond the lifestyle implications of a move abroad, there are financial and tax considerations of a move that many don’t plan for before they pull the trigger on moving.”
The most common misunderstanding is the idea that you don’t have to file a tax return from abroad, according to Minott. “Many who live abroad assume that leaving the U.S. and living outside its jurisdiction means no tax returns,” she said. “But once they have the basic understanding that U.S. taxes are going to follow them wherever they may be, there are certain mechanisms to reduce and often eliminate U.S. tax. It’s also important to consider that the new country may also have local tax requirements that need to be met.”
Many of the countries that are attractive to those looking to relocate have little to no tax, making for significant tax savings overall, Minott observed: “Someone in the British Virgin Islands or the Cayman Islands will be able to take advantage of the low taxes to achieve overall tax savings.”
There is quite a bit of recordkeeping involved in properly preparing a U.S. tax return, Minott indicated. “For example, one of the mechanisms utilized to lower U.S. taxable income is the requirement that the taxpayer report their travel to and from the U.S. each year,” she said. “There are a couple of ways to qualify for the foreign earned income exclusion. One involves being absent from the U.S. for 330 days during the year. It’s important to keep track of travel, foreign housing expenses, and income earned stateside versus offshore."
A big issue, with possible extremely negative unexpected consequences, is the obligation to report the maximum account balance held in foreign bank and financial accounts to the Treasury Department. The report is made on a Report of Foreign Bank and Financial Accounts, or FBAR, on FinCEN Form 114. A United States “person,” including a citizen, resident, corporation, partnership, limited liability company, trust and estate must file an FBAR.
“There are big penalties for failure to do this,” said Minott. "The penalties start at $10,000. There’s no reason to miss filing — it’s just a disclosure, it doesn’t yield a tax liability.”
State residency is an issue that needs to be carefully examined, according to Minott. “Every U.S. state has different rules surrounding what would be a tax residence,” she said. “Some, like California and New York, make it very challenging to break state residency when you’re moving abroad.”
“As a result, many taxpayers choose to relocate to a different U.S. state before moving abroad,” she said. “Many taxpayers relocate to a non-income-tax state prior to relocation abroad. Texas and Florida are the most popular as interim relocation states.”
Not every taxpayer moves to a low or no-tax jurisdiction such as the British Virgin Islands or the Caymans, Minott observed. “Many taxpayers find themselves moving to countries where they do, in fact, have a tax obligation. In those circumstances where they do have a foreign tax obligation, there are also mechanisms to reduce U.S. tax, based on the foreign tax they already paid. More often than not, they won’t be in a double-tax situation thanks to the foreign earned income exclusion, foreign tax credit or a tax treaty in effect with their country of residency.”
But for the many freelancers that are taking advantage of the ability to work from anywhere, the self-employment tax does not go away, Minott cautioned. “Unless the country has a totalization agreement with the U.S., the U.S. taxpayer will continue to pay self-employment tax to the IRS,” she said.
“Many taxpayers choose to set up a business in their new country,” Minott remarked. “This can generate a number of international disclosure requirements with the IRS. Holding a foreign corporation or a partnership interest can create a complex filing situation on the U.S. side. It’s vital that the expat understand the implications of those business interests prior to incorporating or setting up a foreign entity."
By Caleb Melby
When Allen Weisselberg’s son got married in 2004, Donald Trump offered the young couple a generous wedding gift: use of an apartment, overlooking Central Park, rent-free.
Market rent on the apartment, owned by the Trump Organization, would have totaled hundreds of thousands of dollars over the seven years the couple wound up living there. The move — carrying tax implications as well as benefits — in some ways brought the family nearer to the living arrangements of Trump’s own children.
The unusual deal is one of several that benefited the family of Weisselberg, Trump’s right-hand man on all matters financial.
Squat, bespectacled and mustachioed, Weisselberg once handled finances for Trump’s father. Donald Trump and Allen Weisselberg are contemporaries — only a year apart in age — but their relationship evolved over the years as Weisselberg went from helping a young Donald navigate the patriarch’s business to standing by his side as Trump ascended to the top role. These days, Weisselberg is the Trump Organization’s trusted chief financial officer, the only non-family member to help oversee the trust set up by the president while he’s in the White House.
For years, Weisselberg commuted from a simple Long Island home in Wantagh to his office in Trump Tower, a far cry from the boss’s splashy lifestyle. That began to change in the early 2000s, with the Weisselbergs becoming more closely knit with the Trumps in ways unusual for an owner and his CFO, detailed in hundreds of pages of legal, financial, property and tax records reviewed by Bloomberg News.
Many transactions were indirect, benefiting Weisselberg family members. Weisselberg’s younger son acquired a unit in the same Central Park building where his brother received years of free rent and flipped it within a few years for more than three times the purchase price. The elder son, Barry Weisselberg, who works for the Trump Organization, went on to occupy yet another apartment where he didn’t pay rent in a Trump brownstone that has received scant attention.
Weisselberg’s sister-in-law was hired by the business to do compliance work. And Donald Bender, the Trump Organization’s accountant, handled tax preparation services for members of the family. While it’s unclear who paid, tax attorneys found the preparer’s dual role unusual.
In Trump’s world of pricey condo towers and hotels, some of the transactions may seem small. But they map a blurry line between personal and company matters, with assets allotted to the most important employee outside the Trump family.
What’s more, the property transactions exist in a muddy middle-ground between gifts and compensation, and most would have tax implications, lawyers say. Barry Weisselberg worked for Trump in the ice rink business in New York, and his use of the apartments could be considered either a gift for Trump’s tax purposes or additional income for the son on top of his salary.
Tax and compensation lawyers who reviewed the transactions, but did not want to comment about the Trump business, said that as a rule, employers can’t take the gift exemption for things of value provided to employees. Most things of value, like free rent, are taxable income for employees unless an exception applies. A review of the young couple’s tax returns for four of the years they lived on Central Park South don’t flag the perk.
Many of the financial documents were provided to Bloomberg by Jennifer Weisselberg, who was married to Barry Weisselberg from 2004 until an acrimonious 2018 divorce. Post-judgment proceedings continue in New York Supreme Court.
Jennifer Weisselberg said much of the couple’s living costs had been covered by Trump’s company and her father-in-law. Financial statements submitted to the court show that her in-laws covered expenses such as rent and tuition immediately leading up to the separation.
Mary Mulligan and Tim Haggerty, attorneys for Allen Weisselberg at Friedman Kaplan Seiler & Adelman LLP, and Alan Garten, general counsel for the Trump Organization declined to comment for this story. Barry Weisselberg didn’t respond to requests for comment.
The wedding gift offer of the apartment at 100 Central Park South came months before the young couple wed. After they arrived in early 2005, they paid only utilities — delivering checks to Trump’s assistant Norma Foerderer — for seven years.
Jennifer remembers the bill running about $400 a month. When the Weisselbergs moved out, the apartment was listed as a rental for $4,950 a month. It sold for $2.5 million in 2016.
During divorce proceedings, Barry Weisselberg described it as a corporate apartment. He’s a manager of the Trump-run Wollman Rink in Central Park.
The designation as a corporate apartment could be problematic for tax purposes. At seven years, the couple’s use wasn’t for temporary housing. Under federal tax law, lodging generally must be offered as a condition of employment if the value is to be excluded from wages. Barry Weisselberg held the rink job before and after his time at the apartment.
Bender served as accountant for both the Trump Organization and members of the Weisselberg family. “As a matter of firm policy and professional rules, we do not comment on the work we conduct for our clients,” Ian Duncan, chief marketing officer for the firm, Mazars USA LLP, said in response to emailed questions about the transactions.
Even before the wedding gift, Trump transferred an apartment on the building’s fifth floor to Allen Weisselberg and his wife, Hilary. Although city records show no sale price, they list a state transfer tax of $610 in 2000, which would suggest the Weisselbergs purchased the one-bedroom unit for about $152,000. Many of the units in the building needed renovation. They sold it to their younger son, Jack, for $148,000 three years later.
In 2006, Jack sold it for $570,000. He later joined Ladder Capital, which became one of Trump’s largest lenders, though people familiar with the matter say he wasn’t involved in Trump financing. Jack Weisselberg didn’t respond to requests for comment.
Other people in Trump’s innermost circle have made their homes in the company’s properties. In 2016, Bloomberg reported that the president’s son, Eric Trump, purchased two more units in the Central Park South building for about $350,000 each, and created a single, impressive apartment. His sister, Ivanka Trump, bought a two-bed, two-bath unit in her father’s Park Avenue property in 2004 for $1.5 million. The following year, Michael Cohen, Donald Trump’s former personal attorney, purchased a unit in the Park Avenue building for $5 million.
Around the time that Allen Weisselberg’s sons moved into the Central Park South apartments, the chief financial officer emerged from his modest surroundings. In 2002, he and his wife bought a Florida home a short drive from Mar-a-Lago. Typically press shy, he made an awkward appearance on Trump’s show, “The Apprentice.”
He and his wife moved from their Long Island home to an apartment in a Trump building on Manhattan’s Upper West Side along the Hudson River. The monthly rent on a two-bedroom unit in the building was recently listed at $7,000. (The building isn’t owned by Trump and has since removed his name.)
During Barry Weisselberg’s divorce in 2018, the Trump Organization provided an additional apartment on which the couple didn’t pay rent. It isn’t clear how the unit’s use was treated for tax purposes.
That apartment is in one of two townhouses on Manhattan’s Upper East Side where Trump has maintained a long-term lease that has gone mostly unnoticed. Though most of the buildings’ units have been rented to others, one hasn’t been for long stretches during the last two decades: the second floor unit at 163 East 61st Street.
Jennifer Weisselberg remembers being told by both her ex-husband and a Trump Organization executive who managed the property that the apartment, a few blocks from Trump Tower, had sometimes been visited by Trump himself. The table had a small TV of the kind he favors for watching cable news, paired with a phone. There was a four-poster bed with Roman columns and gold curtains.
“It was his style,” she recalled.
It’s currently listed for rent at $3,500 a month — furnished.
Learn how to plan ahead in the face of uncertainty.
Every 4 years, we take a look at how the presidential and congressional elections may impact your personal finances: taxes, investments, health care, retirement, and more. Our analysis is intended to be non-partisan and focused on helping you plan today for potential scenarios and outcomes.
Seizing opportunities and managing risks are an essential part of investing. Sometimes you can see them clearly. But other times, uncertainty can cloud the way, leading to stress, even paralysis. For some investors, right now may be one of those times.
The good news is there are things you can do in the face of election and other uncertainties to stay in control of your destiny. Here are 9 insights from Fidelity pros to help you foresee possible risks, seize opportunities, and stay focused on reaching your personal goals.
Learn more about how the 2020 election outcome could impact your finances.
Because of the expected surge in mail-in voting due to the pandemic, it’s possible the election results will not be known on election night and a complete vote count may not be available for days or weeks.
"When you look at futures markets, they are already pricing in higher volatility in the November and December time frame,” says Dirk Hofschire, senior vice president of asset allocation research at Fidelity. “This may ultimately be short-lived because the Constitution requires a new president and congress in January. But I do think as an investor, the markets are telling you there may be a little bit more bouncing around than usual."
For most investors with a solid long-term plan, there is no reason to do anything in the face of short-term volatility. For opportunistic investors with cash on the sidelines, a pullback could present opportunities.
For more, read Viewpoints on Fidelity.com: What if election results are delayed or contested?
While the election may roil markets in the short term, Jurrien Timmer, Fidelity’s director of global macro, says the pace of the economic recovery and the course of the coronavirus pandemic are likely to be more important to stock market returns than who ultimately controls the White House and Congress.
Historically, Octobers of election years have experienced heightened volatility. But once the winner is declared, markets have rebounded. Over the course of a full 4-year presidential term, investment returns have been surprisingly similar regardless of which party controls the White House: Under Democrats, returns have averaged 8.8%; under Republicans, 8.6%.1
Returns are historical averages. Market performance is represented by monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average, and Cowles Commission). Source: Fidelity Investments.
Despite the ravages of the coronavirus on some sectors, particularly those associated with leisure and travel, most signs point to a healing economy. The US is in the early phase of the economic cycle, which has typically offered the strongest stock returns of all 4 phases of the business cycle.
Past performance is no guarantee of future results. Asset class total returns are represented by indexes from the following sources: Fidelity Investments, Ibbotson Associates, Barclays, as of July 1, 2020. Source: Fidelity Investments proprietary analysis of historical asset class performance, which is not indicative of future performance.
Sharp corrections are not unusual during long-running bull markets. Consider the 1950s and the 1980s: 2 lengthy bull markets that also had a deep correction in the eighth year.2 So if the current secular bull market continues, it would not be unprecedented.
Plus, we are not seeing any of the common warning signs of the end of a bull market—heavy inflows into stock funds, increased mergers and acquisitions, rising interest rates, weakening revisions to earnings, and a shift to defensive sectors as leaders in the market.
Past performance is no guarantee of future results. It is not possible to invest directly in an index. Index performance is not meant to represent that of any Fidelity mutual fund. Source: FactSet as of 03/16/2020. (Chart's y-axis is on log-scale.)
No matter which party wins the White House, spending from the federal government is likely to remain high. Spending is likely to be highest in a Blue Wave scenario where Democrats take control of the White House and both chambers of Congress. It's likely that either a Republican or Democratic president with a divided Congress would also pass stimulus bills, just not as expansive. Currently, markets seem to be pricing in the potential for a Blue Wave and a lot more spending, according to Timmer.
Expansionary fiscal policies could buoy stocks while the Fed absorbs the growing deficit by increasing the money supply through asset purchases. Such a fiscal/monetary cocktail may well be the most important driver for asset prices in 2021 and beyond, says Timmer.
In the short term, expect interest rates to stay low, providing opportunities for borrowers and challenges for savers. In this environment, you might want to consider refinancing your home if you can capture lower rates. If you’re saving for the long-term, there are higher yielding options than money market funds to consider as well.
But if deficits continue to grow, there could be risks of inflation longer term. To hedge against that risk, you might consider adding some inflation protection to your investment mix with such investments as commodities, real estate, gold and Treasury Inflation-Protected Securities.
Some investors worry about rising taxes if the Democrats were to take over the White House and Congress. But history suggests that rising taxes do not mean falling stocks. In fact, in the 13 previous instances of tax increases since 1950, the S&P 500 has shown higher average returns, and higher odds of an advance,3 according to Fidelity's sector strategist, Denise Chisholm. That’s likely because tax hikes often coincide with periods of rising government spending, which tends to stimulate the economy.
Tax policy could change a lot or a little—or not at all. There's no way to know, so it’s important not to let potential policy changes drive investment decisions that might not be good for you long term.
But if you are concerned about rising tax rates, there are a few steps to consider taking this year, which may be good moves regardless of who wins, but even better if taxes rise next year. Among those to discuss with a financial advisor:
Democrats tend to favor tighter regulations on businesses, so a shift in leadership in Washington could hurt certain industries, while helping others.
From a tax and regulatory perspective, industries that could continue to benefit from a Republican White House’s focus on deregulation include those that have historically been highly regulated and that do most of their business domestically. Examples include fossil fuels, health care, defense, domestic banks, and financial services companies. A Democratic White House would likely be tougher on them.
Industries that could benefit from a Democratic administration could include those that generate a large part of their income internationally, those that would be unaffected by higher tax rates, and some that may benefit from new regulation. Some examples include utilities, renewable energy, infrastructure builders, global financials, and parts of the insurance industry.
If you are an active investor who tactically allocates among different sectors, you may want to make some adjustments if regulatory policy changes in Washington.
It’s easy to let emotions about elections cloud your financial decision-making. But acting when you're fearful or anxious can lead to results that can undermine your long-term investing success. Some antidotes include:
2020 has been a trying and tragic year. Particularly at uncertain times like these, having a financial plan can help you take control over your financial future. If you find it challenging to navigate market volatility or are concerned about the implications of future tax policies, let us help.
By Danielle Lee
The Securities and Exchange Commission awarded a record more than $114 million to a whistleblower that helped lead to the successful enforcement of SEC and related actions.
The award — comprised of an approximately $52 million award in connection with the SEC case and about $62 million resulting from related actions by another agency — marks the highest award in the whistleblower program’s history. The combined $114 million, given to an unidentified whistleblower per the SEC's confidentiality rules, surpasses the next highest award of $50 million, given to an individual in June 2020.
In total, the SEC has awarded approximately $676 million to 108 individuals since issuing its first award in 2012.
“Today’s milestone award is a testament to the Commission’s commitment to award whistleblowers who provide the agency with high-quality information,” said SEC Chairman Jay Clayton in a statement. “Whistleblowers make important contributions to the enforcement of securities laws and we are committed to getting more money to whistleblowers as quickly and as efficiently as possible.”
All payments through the whistleblower program are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. Awards are only given to whistleblowers who voluntarily provide the SEC with original, timely and credible information that leads to a successful enforcement action and can range from 10 to 30 percent of the money collected when the monetary sanctions exceed $1 million.
“The actions of the whistleblower awarded today were extraordinary,” said Jane Norberg, chief of the SEC’s Office of the Whistleblower, in a statement. “After repeatedly reporting concerns internally, and despite personal and professional hardships, the whistleblower alerted the SEC and the other agency of the wrongdoing and provided substantial, ongoing assistance that proved critical to the success of the actions.”
One of the year-end routines faced by employees with employer-provided health care is the plan elections required every year. With the coronavirus pandemic still very much ongoing, these may be especially important this year — and they involve a number of important tax considerations.
Among the tax issues are the individual mandate and the constitutionality of the Affordable Care Act itself, according to Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting.
“The individual mandate was repealed in 2019,” he said. “It required a payment with a tax return for failure to maintain minimum essential health insurance coverage. And the Supreme Court will be reviewing a case that may determine if the repeal of the individual mandate invalidates the entire Affordable Care Act.”
In California v. Texas, a group of states are challenging the constitutionality of the ACA. The case is scheduled to be heard before the court on Nov. 10, 2020.
“For now, the ACA is still in place,” Luscombe said. “Open enrollment with the health insurance marketplace continues normally for 2020. The open enrollment period is from Nov. 1, 2020, to Dec. 15, 2020, with coverage starting Jan. 1, 2021. A special enrollment period with the health insurance marketplace may also be available for the remainder of 2020 for people who have special situations, such as lost health coverage, getting married, moving, or having a baby or adopting a child.”
“The IRS allowed people to make mid-year changes to their plans due to the pandemic,” Luscombe noted. “But even if they did 2020 revisions to their health plans and FSAs, they must enroll again for 2021.”
Medicare, he noted, has a separate enrollment period from Oct. 15 to Dec. 7, and eligible low-income individuals may enroll in Medicaid or the Children’s Health Insurance Program, or CHIP.
The medical expense deduction, which for many years had to exceed 7.5 percent of adjusted gross income, was raised to 10 percent, but was set back at 7.5 percent for 2020, according to Luscombe. “However, it will revert back to 10 percent of AGI in 2021 unless Congress acts to change it,” he said. “A lot of people were postponing elective surgeries because they didn’t want to be in the hospital during the COVID-19 pandemic, But there could be an advantage to having the surgery done in 2020 in order to take advantage of the lower AGI threshold.”
“Of course, it’s possible that the low threshold could become one of the regularly expiring provisions that Congress always gets around to extending retroactively, so they might do that for 2021,” he added.
For those with a high-deductible health plan, including a marketplace plan, Luscombe recommends enrolling in a health savings account.
“They’re still out there, and are one of the best vehicles the IRS has to offer,” he said. “Not only does the holder get an upfront deduction, but there’s deferral while the money is in the account, and a tax-free withdrawal if the money is used for qualified medical expenses. For the 2020 plan year, the minimum deductible is $1,400 for an individual and $2,800 for a family.”
The other tax-saving vehicle, flexible spending accounts, are also widely used, Luscombe indicated. “They’re older than HSAs,” he said. “The money contributed to an FSA is not taxed, so the individual will save an amount equal to the taxes they would have paid. The drawback is a ‘use it or lose it’ feature which makes them less popular.”
The IRS reminds taxpayers that criminals and scammers often try to take advantage of generous taxpayers who want to help disaster victims. Everyone should be vigilant. These scams often pop up after a hurricane, wildfire or other disaster.
These disaster scams normally start with unsolicited contact. The scammer contacts their possible victim by telephone, social media, email or in-person. Scammers also use a variety of tactics to lure information out of people.
By Michael Cohn
The Internal Revenue Service is improving its filters for detecting identity theft in business tax returns, according to a new report, but it’s still letting many potentially fraudulent refund claims get through.
The report, released Monday by the Treasury Inspector General for Tax Administration, pointed out that new fraud patterns are constantly evolving, so the IRS has needed to adjust its existing ID theft filters and continue to expand its detection processes to include more types of business tax returns.
Identity theft is more commonly associated with individuals, but it can happen with businesses as well. For example, an identity thief may file a business tax return using the Employer Identification Number of an active or inactive business without the business owner’s permission or knowledge of the owner to obtain a fraudulent tax refund.
For its report, TIGTA found the IRS is continuing to take various actions to improve its detection of business identity theft, including expanding the number of identity theft filters from 35 in tax-processing year 2018 to 84 in 2020. However, TIGTA believes further expansion of detection capabilities to include other types of business tax returns is still needed. For example, TIGTA found that 36 business return types with refunds issued totaling $10.5 billion in processing year 2019 weren’t evaluated for potential identity theft.
In a partially redacted part of the report, TIGTA’s review identified 11,908 returns of a specific type with refunds totaling almost $63.2 million for which the amount reported on the tax return differed from the amount reported to the IRS by a third party. However, the agency’s existing ID filters don’t check for this characteristic.
In addition, TIGTA’s review identified 3,283 tax forms of a certain type with refunds totaling almost $21 million that should have been identified by the IRS’s business identity theft filters but instead were excluded from evaluation by the filters. The IRS is also continuing to use processes that don’t protect potentially fraudulent refunds from erroneous release. TIGTA found that 1,966 of the 6,110 returns that the IRS’s filters had selected as potentially fraudulent had their associated refunds, totaling almost $110.4 million, erroneously released before a tax examiner confirmed the validity of the refund. The mistaken release of the refunds stemmed from a process that allows other functions at the IRS to release refunds associated with returns that the service's return integrity and compliance services function has identified and selected for review as potentially fraudulent.
To cap it off, once the IRS determines that a tax refund claim isn’t a case of identity theft, the service isn’t releasing the refunds on a timely basis. TIGTA’s analysis identified 821 taxpayer accounts for which the associated refund freeze was released 21 or more days after a tax examiner determined that the return was valid. The delays led to additional interest being paid by the IRS, totaling more than $1.3 million.
TIGTA made four partially redacted recommendations in the report to the IRS’s Wage and Investment Division commissioner to improve the identification of business identity theft. Those include expanding the business identity theft filters, revising the filters to use some piece of information that’s posted to the taxpayer’s account, and setting up procedures to make sure that tax refunds are promptly released once the IRS has determined they are not the result of identity theft. IRS officials agreed with all four of TIGTA’s recommendations and plan to take action on them.
“The detection of business identity theft can be challenging in that it shares many characteristics of noncompliance or attempts to defraud by individuals with legitimate authorization to use the businesses’ information,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Since 2015, we have improved and expanded our ability to detect both conventional fraud and identity theft fraud associated with the filing of business tax returns. As noted, the number of filters being used to detect business identity theft has expanded from 35 in 2018 to 84 in 2020. We also increased both the number of dynamic selection lists and our detection coverage to include additional business tax returns. The volume of filings for these business tax returns, processed in 2019, accounted for 82 percent of the refunds issued to businesses that year.”
By Michael Cohn
The leaders of Congress’s main tax-writing committee are wondering if the Internal Revenue Service will be ready to handle next tax season as it’s still processing millions of pieces of correspondence that went unopened for months during the COVID-19 pandemic.
House Ways and Means Committee chairman Richard Neal, D-Massachusetts, and Oversight Subcommittee chairman Bill Pascrell, D-New Jersey, sent a letter Thursday to IRS Commissioner Chuck Rettig asking him to answer their concerns about the agency’s preparedness for the upcoming tax-filing season due to the ongoing backlogs.
“Clearly, the current filing season has been long and challenging for the IRS due to the ongoing pandemic, and we are concerned about another filing season fast approaching,” they wrote. “As you are aware, this filing season, the tax filing deadline for individual returns was extended to July 15, and the automatic tax filing extension of October 15 only just passed. Millions of taxpayers still have not had their tax returns processed, and we continue to hear from constituents who now believe their returns are ‘missing’ and others who anxiously await needed refunds. With the current backlogs, it appears the processing of 2019 returns likely will extend into 2021.”
They pointed out that the end of the calendar year is a time when the IRS usually develops tax forms and publications, prepares and tests its information systems for changes to the tax laws, and staffs and trains taxpayer assistance and other employees for the next filing season. In addition to the typical filing season workload, they noted that the IRS has some additional responsibilities this year related to the tax provisions in the CARES Act.
That includes processing the remaining Economic Impact Payments that have yet to be distributed. On Friday, the IRS announced that it has designated Nov. 10 as National EIP Registration Day in an effort to get the remaining taxpayers who have not yet received their payments ahead of the extended Nov. 21 registration deadline.
“While we remain troubled by the backlogs and issues attendant to the current filing season overflowing into the next year, we also are worried that the next filing season will arrive without the normal IRS preparedness and the necessary pandemic contingency preparedness,” Neal and Pascrell wrote.
They asked Rettig for answers by next Thursday to their questions about whether the 2021 filing season will begin on time next year, on what date the IRS expects to open the filing season, and is the IRS prepared for it.
Review your estate plan regularly to ensure it meets your needs.
Do you remember when you last reviewed your estate plan? If the answer is when you first signed the stack of documents at your attorney’s office, then you’re not alone. Many of us complete an estate plan and then fail to revisit it for years (and some never do).
It is important, however, to review a plan every so often due to ever-changing tax laws and major life events, such as a birth, marriage, divorce, or death. At a minimum, you should consider dusting off and revisiting your estate plan every 3 to 5 years, to help ensure alignment with current laws.
Below is a list of 10 common pitfalls of an outdated estate plan. If any of these apply to you, it may be prudent to meet with your estate planning team to review and, perhaps, update your plan.
Do you know who your fiduciaries are? A fiduciary is someone who is appointed to take legal control over assets for the benefit of another person (the beneficiary). It is a fiduciary's legal responsibility to act in the beneficiary's best interest. Two types of fiduciaries often seen in estate plans are executors and trustees.
Executors are typically appointed in a will and are given control of assets during the probate process, until the assets are ultimately distributed to the named beneficiaries. Executors are responsible for collecting all the assets of the deceased, paying final debts, paying expenses, and filing any estate tax returns.
Trustees control the assets held within trusts, which may have been set up during a person's life, or at death under the terms of a will. While an executor's role is typically for a finite period, a trustee's role may continue either in perpetuity or until the trust is terminated. A key role of the trustee is to make distributions to a beneficiary while following the terms of the trust agreement. Executors and trustees generally bear responsibility for investments, accountings, and tax filings during their tenure.
Outdated estate plans often name fiduciaries or successor fiduciaries that may no longer be suited for the position. A fiduciary named years earlier may be too elderly, or even deceased. If a professional (e.g., attorney, CPA) is named, it is possible that they may no longer be practicing, or their professional relationship with the beneficiary may have since ended. Even named corporations, which we generally assume to exist in perpetuity, may have merged with or been acquired by another entity. And children who may have been too young to serve when the documents were created could now be capable of taking on the role of fiduciary.
Although fiduciaries are bound by certain standards of law, it is most important to name individuals you trust. Other important considerations are the age, maturity, and level of financial knowledge of the fiduciary. It is quite possible that the individuals who had fit most of these qualifications may have changed over the years and now no longer do.
Check to see who you have named as fiduciaries in your estate planning documents to determine whether you need to revisit these designations.
When a child is young, a key estate planning decision parents often make is to determine a guardian. If your child is now an adult, however, a guardian may no longer be relevant, but new considerations arise: Is your child married? Is your child financially responsible? Are you leaving assets to your children in a trust? Have your children had children of their own?
Many trusts are designed to distribute assets to children at certain ages, e.g., one-third at age 25, one-half of the remaining assets at age 30, and the remaining balance at age 35. If a child is now above one or more of these ages, they will receive distribution of part or all of the trust assets outright and free of trust upon the last to die between you and your spouse. Now that your child is older, you may feel differently about their ability to handle a large inheritance; for example, you may feel that large sums might not be spent in the most prudent manner if they are free of restrictions. Further, if the child is married, an inheritance can easily be commingled with the spouse's assets, possibly subjecting the distributed trust assets to equitable distribution upon a divorce. An inheritance free of trust will also be subject to any existing or future creditor claims. These are some of the factors you may wish to consider when reviewing your estate plan to determine if it still meets your needs.
Furthermore, in many cases, outdated estate plans are simply not consistent with current wishes or circumstances. For example, it is possible that one child within a family has been financially successful while another has not. When an estate plan is initially created, an equal amount of inheritance among children may have been the goal, but that may have changed over time. Also, in some cases, beneficiaries named on retirement accounts and life insurance policies may not be in line with the trusts created for children under a will or revocable trust. It is vital to revisit all the ways assets are being left to children, given their current age and maturity, to make sure the plan still matches the current intent.
Lastly, when children are minors, they do not typically need health care powers of attorney, living wills, or advance health care directives, since their parents or guardians are legally responsible for them. But once they become adults, they should consider having these important documents in their own right.
Periodically review the ways that assets will be left to your children, and encourage them to have the appropriate estate planning documents in place as they get older and their circumstances change.
The Health Insurance Portability and Accountability Act (HIPAA) was passed in 1996, in part to establish national standards for protecting the confidentiality of every individual's medical records and other personal health information. As a general rule, health care powers of attorney, living wills, and advance health care directives should contain provisions waiving an individual’s HIPAA rights with respect to their health care representatives.
These stipulations allow physicians and other health care professionals to share a patient’s medical information with their representatives, empowering them to make informed health care decisions. Without these HIPAA authorizations in health care documents, doctors may be unwilling to share medical information, which may impede decision-making regarding a patient's care and any end-of-life wishes. These concerns would also apply to adult children who may have just graduated from high school or are attending college.
Take stock of your family's health care powers of attorney, living wills, and advanced health care directives, to ensure that health care representatives can make informed decisions regarding your family's care.
Financial security is a goal for us all, but with wealth comes complexity. An increase in wealth not only typically causes an increase in annual income taxes, but it may also beget estate and gift taxes. Current federal law allows each citizen to transfer a certain amount of assets free of federal estate and gift taxes, named the "applicable exclusion amount."
In 2020, every citizen may, at death, transfer assets valued in the aggregate of $11.58 million ($23.16 million for married couples), free from federal estate tax. For gifts made during one's lifetime, the applicable exclusion amount is the same. Therefore, every person is allowed to transfer a total of $11.58 million during their life or at death, without any federal estate and gift tax. (This does not include the annual gift exclusion, which applies as long as each annual gift to each recipient is less than $15,000.)
Therefore, generally, only estates worth more than these amounts at the time of death will be subject to federal estate taxes. But this wasn't always so. From 2001 to 2009, the applicable exclusion rose steadily, from $675,000 to $3.5 million. 2010 was a unique year, in that there was no estate tax, but it was brought back in 2011 and then made permanent (unless there is further legislation) by the American Tax Relief Act of 2012 at an exclusion amount of $5 million, indexed for inflation. The Tax Cuts and Jobs Act passed in December of 2017 doubled the exclusion amount to $10 million, indexed for inflation ($11.58 million for 2020). However, the new exclusion amount is temporary and is scheduled to revert back to the previous exclusion levels in 2026.
Outdated estate documents may include planning that was appropriate for estates at much lower exemption values. Many documents have formulas that force a trust to be funded up to this applicable exclusion amount, which may now be too large or unnecessary altogether, given an individual’s or family’s asset level.
Take the time to review the formulas in your estate documents with your attorney and tax professional to determine whether the planning you have in place is still appropriate.
Where were you living when you drafted your most recent estate plan? Each state has its own estate and income tax laws, and it is important to plan appropriately. Furthermore, some states are common law property states and others are community property states. There are significant differences between them when it comes to transferring assets, and a document drafted in a common law property state might not be appropriate in a community property state.
As of 2020, 17 states and the District of Columbia* also impose some form of estate or inheritance tax. Additionally, each state has different exemption amounts, so it is vital to evaluate your current wealth and estate planning needs with your attorney, keeping both the federal and your state's exemption amounts in mind.
In addition, for many married couples in a state that imposes a state estate tax, this may have the effect of requiring payment of state estate tax after the first death, when none had been anticipated. Prior to 2001, because the "pick-up tax" was imposed only on estates that had to pay federal estate tax, estates below a certain threshold did not have to worry about such a tax. The threshold was the amount of the federal applicable exclusion amount. That is no longer the case. The practical effect of the difference between a state's exemption amount and the federal applicable exclusion amount is that certain estates will now be subject to a state estate tax, despite the fact that the estate is exempt from federal estate tax. In some situations, establishing a trust as part of an estate plan can help counter state estate tax implications.
Review your estate plan with your attorney and tax professional, with an eye toward reducing federal and state estate taxes, and make sure to reevaluate and potentially update your plan to establish residency in another state.
Portability rules allow a surviving spouse to take advantage of any unused portion of their spouse's applicable exclusion amount, provided that a federal estate tax return is filed to preserve the deceased spouse’s unused applicable exclusion amount within 9 months of their passing (15 months if an extension is granted).
Prior to portability, many estate plans included credit shelter trusts (CSTs). CSTs are sometimes referred to as bypass, family, or exemption trusts and are typically funded with assets having a value equal to the applicable exclusion amount ($11.58 million in 2020) of the first spouse to die. Assets placed in a CST can be excluded from the estate of the surviving spouse if the applicable exclusion amount of the first spouse to die is properly allocated to it. Prior to 2011, couples were required to use a CST to preserve the exclusion of the first spouse to die. With portability, this is no longer required. However, it should be noted that flexibility may be limited by the non-portability of the generation-skipping transfer (GST) tax exemption and at least some state estate tax exemptions, which still limit the time period in which the exclusion may be allowed. Although there may still be other reasons to use a CST, you might consider reviewing your estate planning documents with your attorney to determine whether allowing more flexibility in the funding of a CST, or the use of portability, is appropriate in your current situation.
As an alternative, for many people, disclaimer trust provisions allowing for this flexibility may be more suitable, considering the allowance of portability. Disclaimer trusts differ from CSTs in that they are optional, and are activated only after the first spouse's death at the election of the surviving spouse, depending on their current situation. There is flexibility in this type of planning because if there is no tax reason to use credit shelter planning, the spouse can simply receive all or a portion of the assets outright. This allows tax-planning flexibility without creating unnecessary complication. In addition, disclaimer trusts may be a good way to help reduce state estate taxes (if your state imposes one) and may help address uncertainty over the size of the marital estate, or concerns that the exclusion amount may decline in the future.
Although recent law allows the portability of the deceased spouse's applicable exclusion amount, there is no portability of the deceased spouse's generation-skipping tax exemption amount. A GST is the transfer of property, directly or in trust, to an individual who is 2 or more generations below the transferor. The IRS taxes these transfers at a rate of 40%. However, the IRS does give an exemption amount for the first $11.58 million (similar to the applicable federal exclusion amount). If you wish to use GST planning for your children so that your assets can benefit them during their lifetimes and then pass to your grandchildren without incurring estate tax at that time, you must preserve the GST exemption.
Given changes to portability, it makes sense to review your estate plan with your attorney and tax professional to ensure that it is still structured in the most efficient way.
For many, with success comes a desire to give back to the community or to causes they feel most passionate about. Individuals may contribute their time (volunteer work), talents (pro bono activities), or treasure (money or other assets). Many donate to religious organizations or to charities that support cancer research or that provide benefits to military veterans. Generally, people donate to charity because they care about these organizations, but they may also be seeking charitable deductions for income tax purposes. The bottom line is that philanthropy is positive for society, for the charity, and for donors' families.
Many of us, however, forget to include our important charitable causes in our estate plans, so our intentions are often not carried out after our deaths. Just like when we give to charity during our lives, there are many of the same benefits available when charitable giving is included in our wills. Everything from direct gifts to charities, to charitable trusts, to donor-advised funds, or to family foundations should be discussed and considered with your estate planning team. There are various ways to help you achieve your charitable goals while ultimately potentially reducing your estate taxes and increasing the amount you pass on to heirs.
Discuss your charitable intentions with your estate planning team to ensure that your philanthropic goals are included as part of your plan.
Your prior estate planning may have emphasized federal estate tax savings because of the much lower applicable exclusion amount and traditionally higher federal estate tax rates. Changes in the federal tax law make it increasingly important to focus on the income tax consequences of estate planning in addition to the estate tax consequences. For estates still subject to federal estate tax, the federal estate tax rate is 40%. These rates must be compared with the top federal income tax rates of 37% on ordinary income and 20% on long-term capital gains and qualified dividends, plus a 3.8% Medicare net investment income tax.
Furthermore, trust income tax rates must be taken into consideration. Trusts are taxed at the highest federal income tax bracket starting at $12,950 in annual trust income. Therefore, when transferring assets to a trust for estate planning purposes, consideration should be given to the potentially negative consequences of higher income taxes. Outdated estate plans may not provide the flexibility required to shift the income tax burden from the trust to individuals in potentially lower tax brackets.
Revisit your estate planning documents and gifting strategies with your attorney and tax professional to determine whether they are still appropriate, considering the Medicare net investment income tax, the current federal estate tax rate, and the increased applicable exclusion amount.
Does your existing life insurance policy still make sense, both from an estate planning and a financial planning perspective? Is the policy performing as expected? Is the policy still competitive with what is available in the marketplace today? Do you own your policy outright or should it be owned by a trust? Many people purchase life insurance and continue paying the premiums for many years, even though their financial picture has changed dramatically.
Carefully review and assess the health of your life insurance and its ownership during your periodic estate plan review to make sure it is consistent with your financial and estate planning goals.
Do your loved ones know what you plan to leave to them when you die? Do they know who to contact when something happens? Fewer surprises will make estate administration much easier when the time comes.
Consider drafting and regularly updating a letter of instruction to your children and fiduciaries. This letter should include an inventory of assets, and a list containing names, addresses, and phone numbers of your estate planning team. Easy access to this information may save your family from headaches down the road. Furthermore, having a discussion regarding your assets, your intentions, and your reasoning (especially when creating trusts rather than leaving assets outright) will help build relationships and avoid family discord, and may even reduce the likelihood of litigation down the road.
Additionally, make sure to give your fiduciaries the appropriate power to handle your assets. There has been a lot of change in recent years to laws regarding the administration of digital assets, such as email accounts, social media accounts, and song and picture libraries. You may want to create a list of your digital assets and name a successor to handle them. Proper documentation of succession planning for your digital assets is necessary because state and federal laws may prohibit others from accessing or using your digital assets without written consent.
Many estate plans no longer meet their original intent due to inattention and a lack of routine updating. Death, birth, marriage, divorce, and having children reach adulthood are some of the many reasons estate plans become outdated. Inevitable changes in laws and the tax code, not to mention changes to family and financial circumstances, further erode a plan’s effectiveness. Successful estate planning requires more than just having signed the initial documents: Your plan should evolve as your circumstances do.
Author: Heather Nezich
Employees are prioritizing their safety, security, and personal values over money and titles according to the results of the Worker Value Survey, conducted by WorldatWork. The study of more than 5,400 working professionals uncovered significant workplace shifts and reflects the impact of COVID-19 lockdowns and social issues.
The survey found that employees value safety more than money and want to align with leaders who take a clear stance on issues in which they believe. The survey also dug into what benefits are most important.
The survey provides insights into how COVID-19 and the current political environment have pushed core values and current issues to the forefront of the employer/employee conversation. According to the survey, employees say:
“This attitudinal shift—across all generations—has implications well beyond the short-term accommodations that companies are making because of the pandemic. Companies must pay attention or risk losing talent to others who are putting employees first,” said Scott Cawood, CEO, WorldatWork
Benefits That Matter the Most
The survey also looked at what benefits matter most to today’s professionals. While employees would like to engineer perfect work and life balances, when asked to rank benefits in order of importance, health insurance outranked lifestyle perks such as paid time off, flexible work schedules, and the ability to work remotely. Scoring 21 points higher than any other benefit, 45% of respondents said health insurance was the most/second most important benefit their company could offer.
Offering a retirement or 401K plan came in second, with 25% of respondents choosing it as their first or second most important benefit. Flexible work schedules and the ability to work from home came in fourth and fifth, respectively.
Source: World at Work
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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