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Good recordkeeping is an essential element of tax planning


Now is a good time for people to begin thinking about next year’s tax return. While it may seem early to be preparing for 2021, reviewing your recordkeeping now will pay off when it comes time to file again.


Here are some suggestions to help taxpayers keep good records.

Taxpayers should develop a system that keeps all their important information together. They can use a software program for electronic recordkeeping. They could also store paper documents in labeled folders.

Throughout the year, they should add tax records to their files as they receive them. This includes Notice 1444, Your Economic Impact Payment, and unemployment compensation documentation. Having records handy makes preparing a tax return next year easier.

  • Taxpayers should notify the IRS if their address changes. Taxpayers should let the IRS know if they change their address. They should also notify the Social Security Administration of a legal name change to avoid a delay in processing their tax return.
  • Review their tax return to make sure they didn’t overlook any credits or deductions. Double check credits and deductions.  Records that taxpayers should keep include receipts, canceled checks and other documents that support income, including any unemployment compensation.
  • Taxpayers should also keep records relating to property they dispose of or sell. They must keep these records to figure their basis for figuring gains or losses.
  • Taxpayers should keep records for three years from the date they filed the return. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later. has several tools taxpayers can use to stay updated on important tax information that may help with tax planning. People can also download the IRS2Go app, watch IRS YouTube videos and follow the agency on social media.




Earning side income: Is it a hobby or a business?

Whether it’s something they’ve been doing for years or something they just started to make extra money, taxpayers must report income earned from hobbies in 2020 on next year’s tax return.


What the difference between a hobby and a business? A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.


Here are nine things taxpayers must consider when determining if an activity is a hobby or a business:

  • Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
  • Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
  • Whether they depend on income from the activity for their livelihood.
  • Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
  • Whether they change methods of operation to improve profitability.
  • Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
  • Whether the taxpayer was successful in making a profit in similar activities in the past.
  • Whether the activity makes a profit in some years and how much profit it makes.
  • Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

The IRS has many resources to help taxpayers report their income correctly. See the more information section below for additional guidance. 




IRS approves temporary use of e-signatures for certain forms


WASHINGTON – To protect the health of taxpayers and tax professionals, the Internal Revenue Service today announced it will temporarily allow the use of digital signatures on certain forms that cannot be filed electronically.


The change will help to reduce in-person contact and lessen the risk to taxpayers and tax professionals during the COVID-19 pandemic, allowing both groups to work remotely to timely file forms.


“We take the health and safety of the nation’s taxpayers, the tax professional community and our employees very seriously,” said IRS Commissioner Chuck Rettig. “Expanding the use of digital signatures is an important step during COVID-19 to help tax professionals. We understand the importance of digital signatures to the tax community, and we will continue to review our processes to determine where long-term actions can help reduce burden for the tax community, while appropriately balancing that with critical security and protection against identity theft and fraud.”


The Form 1040, U.S. Individual Income Tax Return, already uses an electronic signature when it is filed electronically, either by using a taxpayer self-selected PIN, if self-prepared, or a tax-preparer selected PIN, if using a tax professional. More than 90% of Form 1040s are filed electronically. The IRS recommends all taxpayers consider e-filing forms this year, whenever possible, because of COVID-19.


The below list of forms is available at and through tax professional’s software products. These forms cannot be e-filed and generally are printed and mailed. The IRS will not specify which digital signature product tax professionals must use. There are several commercial products available.


The following forms can be submitted with digital signatures if mailed by or on Dec. 31, 2020:
• Form 3115, Application for Change in Accounting Method;

• Form 8832, Entity Classification Election;

• Form 8802, Application for U.S. Residency Certification;

• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

• Form 1120-RIC, U.S. Income Tax Return For Regulated Investment Companies;

• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

• Form 1120-L, U.S. Life Insurance Company Income Tax Return;

• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; and

• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms.


The IRS will closely monitor this temporary option for e-signatures and determine if additional steps are needed.




9 Ways to Help Small Business Clients Be Financially Successful

By canopy


1. Separate business finances from personal

Many business owners jump into opening their business without a true understanding of finances. Sure, they understand the goal is to turn a profit, but the nuances are where you step in. One of the biggest errors small business owners can make is allowing their personal and business finances to intertwine. For reasons obvious to you, this is a big no-no. Educate your client on how mixed business and personal finances can lead to confusion down the line, a lack of organization, and just the overall headache of creating more work for you and them when they already have a small business to focus on. 


2. Point toward business banking

If your client currently has their personal and business finances under one roof, it’s time to talk to them about why that isn’t wise. Perhaps they were worried about having to organize two very different accounts, but as you know, it doesn’t have to be a challenge. Point your clients toward a digital small business bank that easily keeps their finances in a user-friendly snapshot on their phone. Aside from the legal and tax purposes of separating personal from business finances, this will give them an easy-to-understand view of their financial health.

To make matters easier on you, digital banking like this can even allow you access to view your clients transactions and books remotely, making it easier to prepare for meetings or provide you the foresight to reach out if you see suspicious patterns in their finances. 


3. Navigate securing a loan

In these uneasy times for thousands of small business owners across the country, securing a loan may be the lifeline they need to make payroll or keep the doors open. For seasonal businesses whose usual busy season was impacted more severely by COVID-19, this is even more prevalent. As with many things when it comes to business finances, your client may not fully understand what they need or the process in which they should go about securing a loan. Whether you help them in an advisory role or take a more hands-on approach, the expertise you can lend may be the difference in your client bridging the next few months and being a client for life or struggling to make ends meet. 


4. Review important documents

Providing an additional set of eyes to review your client’s documents is always a good idea. If, for example, your client is looking to host a charitable event, purchase new office space, or make a major purchase, you should take a look over the agreement. Anything that can have implications on your work should be reviewed and meet your requirements. Not only will this give you an opportunity to understand where their business is heading and what work you may have coming down the line, but it will also ensure your client is covered should anything be off in the initial agreement. 


5. Explore growth opportunities

As a trusted partner, you surely understand that the small business owner’s day to day is anything but a constant routine. Just as they deal with a plethora of challenges each day, they are also confronted with the prospect of growth. As an accountant, you can have informed conversations with your client as to the financial health of their business. 70% of small business accountants see their relationships with owners becoming more strategic, with growth being a part of that strategy. Perhaps they are interested in opening a second location or have the ability to ramp up hiring. 


Almost everything a small business owner does in their business boils down to finances, and talking about potential areas for growth can help position yourself as a valuable partner. If you want to get technical in your services, you may consider offering your client employee-based financial metrics such as what activities are bringing revenue and which aren’t aiding toward revenue goals. This will help empower your client to make well-judged decisions in terms of cutting their shortcomings and steering their business toward growth. 


6. Advise in marketing

Giving marketing advice may not be right in your wheelhouse, but marketing and advertising cost money. Advising your client where and when to allocate marketing budgets can prove useful. While your client may be spending in one area, offer your expertise and insights from what other clients may be doing or offer perspective from the opposite side. Consider keeping up to date on marketing and advertising trends through a number of newsletters. Being well-versed in areas other than just accounting will help drive home your value to clients and allow them to look to you for advice on other aspects of their business.


7. Help with personal finances

If your client has a business that needs work on financial matters, odds are they could use some help with their personal finances. By being the one to handle all their financial holdings, it can help you paint a broader picture of where your client stands and what moves or risks they may or may not be able to take. Often finances are tied into wills and estate planning, yet another area you can assist them in. 


8. Organize for tax season

When it gets down to brass tacks, one of your biggest roles in serving a client is helping them prepare for tax season. All the steps listed above will help you ensure the client is organized throughout the year so there aren’t any last second surprises just before the tax deadline. As you know though, you can save your client time and money by preparing them for tax season quarter by quarter. Setting aside funds that will be taxed also saves them headache and confusion down the road as opposed to taking out one lump sum.


9. Develop a succession plan

Depending on the stage in which your client is at in their business, they may be considering retirement plans, selling the business, or passing it down. All of these options along with others have financial implications. Regardless if your client is ready to step back immediately or down the line, it’s never too early to begin planning their succession. Nearly half of family businesses have no succession plan in place, and depending on the size of the operation, or if the passing of the guard is unexpected, it can be an extremely difficult process. Start by looping in the successor into financial conversations so they understand where the business stands and how they can make strategic moves now to put the business in the best possible position.


As is the case with almost everything, going above and beyond your normal service can truly separate you from the competition. When it comes to helping small businesses, this is exaggerated. Taking the additional time to lend your accounting and financial expertise and knowledge will not only help them thrive in the short and long term but will also cement you as an invaluable piece to their bigger team.





A President Out of Control on Taxes

by James Edward Maule


According to many reports, including, for example, this one, the President claims he is “considering a capital gains tax cut in an effort to create more jobs.” It is unclear whether he is referring to the previously-circulated idea of indexing basis, an idea I excoriated in The Menace of Impetuous or Manipulative Tax Policy Announcements, or to his intent to issue a unilateral reduction or elimination of capital gains rates.


This time, as reported by several sources, including Accounting Today and Ventural Broadcasting, two top White House officials have admitted that the President cannot cut capital gains tax rates unilaterally by executive order. They admitted that changes in tax rates are within the purview of the Congress. Though they seem to have remembered what they learned in their Civics course, or perhaps made the effort to find out how law-making is done in this country, it seems the President doesn’t have a clue. Presumably they have shared their knowledge with the President, but how that conversation went isn’t something disclosed to the public.


Some Americans, understandably frustrated with how politics works and convinced that a businessman would do a better job of “running” the country, voted in favor of putting a businessman in the White House. Of course, the alleged businessman was a dabbler in real estate using inherited money, and a failure at running businesses. Between stiffing workers and suppliers and going bankrupt multiple times, he demonstrated everything that a successful businessman is not. As the meme puts it, they wanted him to “run the country the way he ran his businesses,” and he certainly has.


In business, the CEO of a non-public enterprise is king, czar, emperor, and lord. The CEO answers to no one. Smart CEOs get an education by going to class, surround themselves with advisors who understand what the CEO does not, listens to and takes advice from those with superior experience, intelligence, and knowledge, and with their help navigates the treacherous world of reality. The Presidency is not a CEO position. It is the top office in one of three branches of government. Its powers are constrained. Changes in tax rates, and changes in the Internal Revenue Code, must originate in the House of Representatives and be approved by the full Congress. Though a CEO can unilaterally and even arbitrarily increase or decrease the prices at which the company sells goods and services, a President cannot unilaterally or arbitrarily change tax rates or eliminate taxes.


Of course, it is possible that the President has no intention of unilaterally cutting capital gains rates. So why propose doing so? Because some of the people who would benefit from such a move, and even people who would not but who some sort of philosophical antipathy towards taxes, and perhaps people who think he is on a path leading to his unilateral repeal of taxes that they pay, find in such an announcement “proof” that he is the “hero” they have come to think he is. The announcement gathers votes. As I wrote more than seven years ago, in The Disadvantages of Tax Incentives, “The well-being of the national economy demands stability, continuity, predictability, and reliability in the tax system. By putting personal electoral goals ahead of the nation’s well-being, Congress is selling the nation short and ultimately risks selling it out.” Rather than taking my advice, Congress continued on a path that in some ways encourages the same sort of behavior by the Executive Branch. Again, I warn, “By putting personal electoral goals ahead of the nation’s well-being, the Administration is selling the nation short and ultimately risks selling it out.”




Inexpensive Ways to Show Employee Appreciation

By Chuck


The workforce has shifted to accommodate for quarantine, social distancing, and so much more over the past few months. For many business employees, this may have meant taking unconventional hours, purchasing new tech to modify the way they work, and working amongst other family members in a very different environment. They deserve to be appreciated, but that doesn’t mean you need to break the bank to do it. Here are a few ways you can acknowledge your employees’ hard work inexpensively. 


Call out small accomplishments

Whether it’s your company Zoom meeting, a conference call, or an email or newsletter, recognizing employees publicly for their hard work and success is important. We recognize employees for lots of things here at ITS but some examples are: great customer feedback, company milestones, finishing up a big project, and increased sales.


Give out gift cards

Gift cards are an easy employee appreciation gift that doesn’t have to be expensive. A gift card to a local coffee shop, business, or restaurant can go a long way. Plus, it helps support your local community. Think about your customer list and consider supporting a small business who supports you. It can mean a lot to your client. You can also do Amazon gift cards or a general Visa Gift card. 


Create fun awards 

Celebrate your employees’ uniqueness and contributions by creating fun awards to give out on a monthly basis. Who’s your Brainstorm Champion, Customer Service Guru, or Funniest Meme Finder, or Sales Magician? 


Snail Mail 

It’s always exciting to get mail that is not junk mail or a bill. It’s even more exciting when you’re stuck working from home all the time. If an employee has gone out of their way to help out another employee or customer or has just been doing an exceptional job, send a handwritten thank you note to show your appreciation.


Ask employees for input

It may sound simple but giving your employees a voice is one of the most empowering things you can do. It shows you care about and value their opinions. It makes them TRULY a part of the team and process. 


Empower Your People

Encourage your employees to make decisions that are in the best interest of your customers and/or the company.  Employees will rarely make a wrong decision. Showing that you trust them can foster mutual trust and respect.


These are all great ways to help raise morale, build loyalty, and help make your culture and workplace better despite the challenges faced during these uncertain times. We’d love to hear more ideas! Share how you show employee appreciation in a comment below.




Testing remote security, and other tech stories you may have missed

By Gene Marks


Making sure you’re secure working from home, spying on employees, and eight other recent developments in technology and how they’ll impact your clients and your firm.


1. Demand for employee surveillance software soars

A recent study has revealed that employers are becoming more and more interested in software that helps track employees and their productivity when working from home. Since April, employers have greatly increased their internet searches for queries such as “how to monitor employees working from home” and “work from home monitoring tools” have increased by 87 percent as compared to before the pandemic hit. According to the study, the unease employers feel with the lack of control and unfamiliarity with having employees work remotely is the main reason behind the spike in searches. (Source: ZDNet)

Why this is important for your firm and clients: I don’t like it and I don’t recommend it. If you’re making the right hires, you should be confident that your employees can do their jobs and complete their tasks in a professional and independent manner without you surveilling them. You’ve got better things to do with your time then babysit your work from employees. What is this, pre-school?


2. This free tool tests your remote security

With more and more companies having employees work from home due to COVID-19, cybersecurity has become an even bigger issue than before. Thanks to the National Cyber Security Centre, individuals working from home can now have access to a free set of tools to help test how secure their systems are from attacks. The new toolkit is aimed at assisting small and midsized businesses to prepare for potential cyberattacks through allowing employees to role play real hacking scenarios and providing approaches for how to effectively handle them. (Source: ZDNet)

Why this is important for your firm and clients: If you’re not up for hiring an IT firm to help with security, the least you can do is have your remote employees download and run this free tool to check for any vulnerabilities. More work may be needed after that, but at least you’ll have the facts.


3. Microsoft introduces a real-time customer feedback tool

Microsoft announced that they are rolling out Dynamics 365 Customer Voice, which is a real-time feedback feature geared toward customers. The addition is due to the fact that — since more companies are moving online due to COVID-19 — a need to gather immediate customer feedback has grown. The Customer Voice tool is able to be customized in order to provide a tailored experience for each and individual business utilizing it. (Source: Tech Crunch)

Why this is important for your firm and clients: Looks like a great and easy way to implement a customized survey tool for the large number of companies that use Microsoft Dynamics. (My company is a Microsoft partner and implements some of these solutions.)


4. Gmail for G Suite has integrated with Chat, Meet, Rooms and more

Google has launched a significant update to G Suite allowing more productivity tools to integrate with Meet, Rooms, Chat, and Gmail in both the web and mobile platforms. Additional features such as Sheets, Slides, Docs, and Calendar will also be included in the update. Part of the update will include the ability to simultaneously work in Calendar, having the video chat function open, while also collaborating and working in a document. (Source: Google)

Why this is important for your firm and clients: The main purpose is to allow the tools to effectively integrate while allowing users to create a more efficient and seamless workflow. Per Google’s blog, “Flexibility isn’t the only thing that workers want. Remote working has significantly increased the demands we’re getting from many directions — in both our professional and our personal lives. People tell us they feel overloaded with too much information and too many tasks across too many different tools. Instead of learning another tool, we need the tools we already use to be even more helpful, and work together, in an integrated, intuitive way.”


5. This is the cheapest 4K laptop right now

The cheapest 4K laptop on the market right now comes from a company you might not be familiar with: Chuwi. The AeroBook Plus by Chuwi can be purchased for less than $600. The device’s dual-core processor was rolled out in 2015 and the device runs off of 8GB RAM, contains Bluetooth 5.0, and has a battery that can last up to eight hours. Currently the AeroBook Plus is able to be shipped all over the world. (Source: Tech Radar)

Why this is important for your firm and clients: Chuwi has been selling technologies for more than 15 years on many online platforms, including Amazon. But the company’s finances and operations are a little murky. Does that matter if you’re getting a good price? I think it does. Laptops and devices need support and — for security purposes — should be bought from known brands if you want to minimize any potential headaches in the future. I would avoid these bargain price options and stick with names you know because hey, when something sounds too good to be true.


6. Notarize and DocuSign due thanks to the pandemic

Notarize and DocuSign both seem to be thriving in the era of COVID-19 and social distancing. Notarize — which is a tool that allows businesses and customers to digitally notarize and sign formal documents — recently raised $35 million and has seen a 400 percent increase in activity since the pandemic broke. Similarly, DocuSign, which has long been a leader in providing legitimate, digital signatures on official documents, is in the process of integrating online notary services as one of their main products through their purchase of Liveoak Technologies, which is a video conferencing platform that provides additional tools to help verify identity remotely. (Source: GeekWire)

Why this is important for your firm and clients: This is a service that’s been needed for a while but has been slow in coming to market. But thanks to Covid-19 and working remotely, we’re finally getting more mainstream tools to get our documents notarized instead of standing in line at the auto tags place or persuading a notary friend with a bottle of wine to do it for us.


7. Slack is now letting you choose when you get notifications

Slack will now allow users to select when they receive notifications day by day, providing the option to limit or stop receiving pings on the weekends. Users will now be allowed to determine when they want to receive notifications as well as select an option to keep from getting pinged on certain days all together. When users decide to turn off their notifications, a “z” will appear next to their name in Slack, indicating that they are on DND (Do Not Disturb). People will still be able to send users messages and notifications while in those modes, they just will not be notified. (Source: The Verge)


Why this is important for your firm and clients: Over the years I’ve badgered business owners who turn off their devices on weekends or on vacation. And I still believe that. When you run a business, you need to be available 24/7. I know there’s life-balance needed, but this is what you signed up for. However, that doesn’t necessarily apply to your employees, particularly those working hard from home all the time. They need time off and should be allowed to take the “z” on a weekend.


8. Apple’s Silicon Macs promise screaming performance

Recently released data indicates that Apple’s new Apple Silicon Mac will greatly meet up to and surpass Windows machines and older models when it comes to efficiency and performance. Developers have started to test the speed of the new Macs and according to those tests, the machines are already running as quickly and efficiently as select Windows tools. The Silicon Macs, which are currently only in development, performed promisingly in field tests, showcasing a single-core score at approximately 811 points and 2871 multi-core points, surpassing Microsoft’s Surface Pro X scores of 726 and 2831. (Source: Computer World)

Why this is important for your firm and clients: As mentioned above, the devices are still in development. According to Jonny Evans of Computerworld, "Mass production is expected to begin in 2022-23. In other words, while Apple is widely expected to deliver vast performance and power efficiency gains in the next generation of processors in its iPhones this year, by the time 5G deployment really takes off (in two to three years) it will have access to an even more high-performance chip architecture." Given the potential productivity benefits, there may be reason to hold off on major Apple purchases until these devices make it to market.


9. NASA is funding small-business ideas

NASA announced that it will be funding over 400 concepts from small businesses with a focus on developing technology that will span from plumbing for the moon, all the way to artificially intelligent medical assistants that can help give a second set of eyes while crews are visiting Mars. Approximately $51 million in contracts will be given to 312 businesses throughout 44 states, as well as Washington D.C. A single contract will be in the amount of up to $125,000 and will last between six to 13 months. (Source: GeekWire)

Why this is important for your clients: It takes a while to get government certification, but if you’re willing to put in the effort, there are many opportunities for grants and contracts. NASA in particular has programs like this one specially aimed towards small businesses.


10. Microsoft adding a new learning app to Teams

Microsoft is in the process of developing a learning application that will be integrated into Microsoft Teams, bringing educational content from various sources into one single location. The app will work similarly to how a customer relationship management system works for a company to help keep track of customer engagement, but will provide and keep track of the learning systems being used. Microsoft is looking to utilize Teams as a platform to help provide integration among skills, work, and learning. (Source: ZDNet)

Why this is important for your firm and clients: Another reason to step up your investment in Teams. Microsoft will continue to expand this platform over the coming years. But will it replace your CRM system? Here are my thoughts.

Note: Some of these stories have also appeared on




Trump pledges big tax cuts that may do nothing for the economy

By Laura Davison

President Donald Trump is tapping his presidential authority to make tax changes that Congress is refusing to do, but his limited power means he could end up over-promising and under-delivering on his pledge to slash IRS bills.


Trump has deferred hundreds of billions of dollars worth of payroll tax levies and is contemplating another executive action that would amount to a roughly $100 billion capital gains tax cut for investors by changing Treasury Department guidelines.


The president is running for re-election in November trailing Democrat Joe Biden in every recent poll. Meanwhile, Congress is deadlocked on another broad stimulus as the country continues to struggle under a still-raging coronavirus pandemic. There are no immediate prospects for more negotiations and the stalemate could drag into September, leaving the economy limping as voters are getting ready to make their choices.

With a recovery key to Trump winning a second term, the actions are aimed at giving a lift to both his working-class base and financial markets. But the tactic comes with a significant amount of political risk.


Those payroll tax payments will still come due unless Congress decides to forgive the amounts, which is no sure bet. Both Republican and Democratic leaders aren’t enthusiastic about slashing the levies that finance Social Security and Medicare.


The president’s plan to cut capital gains taxes would involve executive action that some conservatives think may overstep his authority and end up in court. And the benefits, if they were to be realized, would be heavily tilted to the wealthy, giving Democrats another opportunity to attack Trump as favoring the rich at the expense of the middle class.


“With payroll taxes, administratively there is no way to make it work perfectly without Congress,” Kyle Pomerleau, a resident fellow at conservative think tank the American Enterprise Institute, said. “With capital gains, it could get tied up in the courts and it just never happens.”


Treasury Secretary Steven Mnuchin on Wednesday indicated at least some in the administration are aware of the pitfalls.


“The president would like to do capital gains tax cuts, and we do need legislation to do what we want on that front,” he said on Fox Business.


With congressional talks at an impasse on another round of stimulus that economists, Federal Reserve officials and market participants all see as essential, Trump unilaterally extended extra unemployment aid and deferred payroll tax payments. When that failed to prod a resumption of talks, and analysts assessed its impact as limited, the S&P 500 turned sharply lower in the final hour of trading on Tuesday.


Some companies are waiting for guidance before deciding whether to take the risk of getting saddled with bills at the end of the year.


Matter of trust

White House economic adviser Larry Kudlow told reporters Tuesday that companies and employees “trust the president” that the tax bills would be forgiven.


Mnuchin, though, indicated some companies may opt not to take the deferral.


“We’re going to create a level of certainty for small businesses who want to do this,” he said.

Trump is reliant on Congress to forgive the deferred tax payments, but that could be a tough sell for lawmakers who have repeatedly dismissed his requests for a payroll tax cut, said Joe Bishop-Henchman, the vice president of policy and litigation at the National Taxpayers Union Foundation.


“He’s been pretty insistent on that for some time now, and Congress hasn’t addressed it,” he said.


Tax changes

Trump on Monday also said he’d soon release a middle-income tax cut proposal. But that would need Congress to act, so any plan would be more a campaign pledge than something that could take effect in the coming months.


Polls have indicated that voters aren’t inclined to trust the president. A Quinnipiac University poll released last month found that 31 percent of registered voters said he was honest, with more than double that — 66 percent — saying he wasn’t.


His penchant for big ideas that never quite come to pass could hurt him as voters find that promised benefits don’t materialize in their bank accounts. Businesses are already worried that Trump’s payroll order could create a series of administrative problems, but not actually deliver any economic boost.


“If employees are burdened with deferred payroll taxes later, then we haven’t provided relief, we have postponed the tax payment at best, all at a significant expense to employers,” Alice Jacobsohn, the director of government relations for the American Payroll Association, said in a statement.


'Much ado'

Mark Zandi, chief economist of Moody’s Analytics, estimates that the executive orders would have “at best” marginal economic benefits, falling short of pledges to provide relief to jobless workers and create jobs through tax cuts.


“The EOs are much ado about nothing,” Zandi said in an email. “Aside from the waiving of interest payments on student loans through the end of the year, which is important for student loan borrowers but has little macroeconomic benefit, the EOs will not be implemented, at least not in the foreseeable future.”

— With assistance from Jordan Fabian, Mike Dorning, Michael Bologna and Saleha Mohsin




IRS makes Form 1040-X amended tax returns available for e-filing

By Michael Cohn


The Internal Revenue Service is now letting taxpayers submit Form 1040-X electronically when they want to file an amended tax return through commercial tax software, in what the agency called a “major milestone in tax administration.”


The move comes after years of effort by the IRS to streamline the process of filing an amended return as more taxpayers use commercial tax prep software to file their own tax returns. The IRS said the enhancement would allow taxpayers to quickly correct their previously filed tax returns while minimizing errors.


“The ability to file the Form 1040-X electronically has been an important long-term goal of the IRS e-file initiative for many years,” said Sunita Lough, IRS deputy commissioner for services and enforcement, in a statement on Monday. “Given the details needed on the form, there have been numerous challenges to add this form to the e-file family. Our IT and business operation teams worked hard with the nation’s tax industry to make this change possible. This is another success for IRS modernization efforts.”


Allowing the 1040-X to be e-filed has been a goal for the tax software and tax professional industry for years and has been a perennial recommendation from the Internal Revenue Service Advisory Council and the Electronic Tax Administration Advisory Committee.


Currently, taxpayers need to mail a completed Form 1040-X to the IRS for processing. The new electronic option enables the IRS to receive amended tax returns faster while reducing errors typically associated with manually filling out the form.


While tax software enables users to enter their data in a simple question-and-answer format, it also makes it easier for IRS employees to respond to taxpayer questions since the data has been entered electronically and submitted to the agency almost simultaneously.


In the initial phase of the IRS’s new change, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically, but further improvements are expected in the future.


Approximately 3 million Forms 1040-X are filed by taxpayers every year. Taxpayers will still have the option to send a paper version of the Form 1040-X and the IRS advised them to follow the instructions for preparing and submitting the paper form. Taxpayers who file a Form 1040-X electronically and on paper can use the "Where's My Amended Return?" online tool to check the status of their amended return.




IRS offers reprieve for taxpayer checks caught in backlog of unopened mail

By Michael Cohn


The Internal Revenue Service is giving taxpayers a break if the checks they mailed in to pay their taxes still haven’t been opened up yet and are sitting in the trailers the IRS had to set up during the novel coronavirus pandemic.


This spring, as many IRS offices remained shuttered, a backlog of millions of pieces of unopened mail accumulated in trailers set up outside IRS facilities. As more IRS employees returned to work to deal with tax season, they began to sort through and process the mail, but that hasn’t stopped more correspondence from coming in every day.


Last week, amid complaints that the IRS had begun sending balance due notices to some taxpayers, even though they had already sent in checks with their tax filings for trusts and estates, the IRS updated its web page on IRS operations during COVID-19 with new information on pending check payments and payment notices, saying that the payments will be posted as of the date received, as opposed to the date when the IRS finally gets around to processing them. The IRS warned taxpayers not to cancel their checks in the meantime, as the IRS will eventually get around to processing them.


“If a taxpayer mailed a check (either with or without a tax return), it may still be unopened in the backlog of mail the IRS is processing due to COVID-19,” said the IRS. “Any payments will be posted as the date we received them rather than the date the agency processed them. To avoid penalties and interest, taxpayers should not cancel their checks and should ensure funds continue to be available so the IRS can process them.”


That should help taxpayers avoid interest and penalties, as long as the check hasn’t been canceled, or it doesn’t bounce.


“To provide fair and equitable treatment, the IRS is providing relief from bad check penalties for dishonored checks the agency received between March 1 and July 15 due to delays in this IRS processing,” said the IRS. “However, interest and penalties may still apply.”


The problem has been particularly acute for taxpayers who are filing Form 1041 estate and trust tax returns and receiving the balance due notices.


“As many advisers have discovered due to clients (especially trusts) receiving notices regarding payments supposedly due on tax returns where payments had been mailed in when the return was filed at July 15, the IRS is behind in processing items mailed to the agency and that includes certain tax payments,” wrote Ed Zollars, a partner in the CPA firm of Thomas, Zollars & Lynch, in a blog post for Kaplan Financial Education.


Besides being short on staff for opening the mail, the IRS is also dealing with the perpetual problem of answering its busy phone lines for taxpayers, and it recommended against calling the agency.


“Due to high call volumes, the IRS suggests waiting to contact the agency about any unprocessed paper payments still pending,” said the IRS. “See for options to make payments other than by mail.”


The current delays in mail service reported around the country may be exacerbating the backlog at the IRS as well. The recently appointed Postmaster General, Louis DeJoy, has come under fire for reforms this summer at the U.S. Postal Service like curbing overtime, prohibiting return trips to pick up undelivered mail, discarding high-volume envelope-sorting machines and removing mailboxes, resulting in slower mail delivery. DeJoy, a logistics executive and former finance chairman for the Republican National Committee, has also reassigned longtime executives at the USPS, leading to accusations that he is trying to sabotage mail-in voting ahead of the elections in November at the behest of President Trump, who has ramped up his criticism of states’ moves to allow universal mail-in voting in response to the coronavirus pandemic, claiming it would lead to voter fraud. House Democrats plan to return to Capitol Hill next week to vote on a bill to stop the changes at the USPS, at least until after the election, and have summoned DeJoy to an oversight hearing.




Top 10 ways companies cook the books

By Jason Zuckerman, Matthew Stock and Katherine Krems


With the recent economic slowdown, companies are under increased pressure to show stability, or even growth, and paint a rosy picture for investors. That pressure will undoubtedly cause some companies to engage in accounting fraud to distort their financial results, thereby misleading investors. As with most accounting scandals, companies are usually unable to sustain the deception, and the house of cards eventually collapses.


The following are 10 of the primary accounting schemes that we regularly see in our practice representing whistleblowers at the Securities and Exchange Commission. Under the SEC whistleblower program, individuals are eligible to receive monetary awards for bringing such frauds to light. In certain circumstances, compliance personnel, including auditors, accountants, officers and directors, may be eligible for awards under the program. Since 2012, the SEC has awarded more than $500 million to whistleblowers, which includes three awards to compliance officers.


Improper timing of revenue recognition

The most common way that companies cook the books is through improper revenue recognition schemes. According to a study by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), more than 60 percent of SEC enforcement actions against companies for financial statement fraud relate to improper revenue recognition.

Revenue should only be recognized once it has been both earned and realized. Improper timing of revenue recognition occurs when a company inappropriately shifts revenue from one period to another. Most commonly, companies inappropriately accelerate revenue recognition in order to meet their earnings targets. Conversely, companies may also inappropriately delay recognizing revenue if they have already met their revenue guidance for the period. This accounting scheme can be difficult to detect, especially when companies have multiple elements or bundled contracts.

Here are some SEC enforcement actions regarding improper timing of revenue recognition :

  • In the Matter of Marvell Technology Group, Ltd., Marvell orchestrated a scheme to accelerate, or “pull-in,” sales from future quarters to the current quarter in order to “close the gap between actual and forecasted revenue and to meet publicly issued revenue guidance.” The pull-ins for these quarters amounted to as much as 16 percent of the company’s total quarterly revenues. Notably, the SEC also has an ongoing investigation against Under Armour for improperly pulling forward sales.
  • In SEC v. Tangoe Inc. et al., telecommunications expense management company Tangoe paid $1.5 million to settle charges that it reported revenue prematurely for work that had not been performed and for transactions that did not produce any revenue at all. The SEC alleged the company counted customers’ prepayments for future services as current revenue, prematurely recorded revenue from contingent fee arrangements, and prematurely counted revenue from long-term contracts with continuing obligations.
  • In the Matter of L3 Technologies, Inc., the SEC charged aerospace and defense company L3 with failing to maintain accurate books and records and failing to maintain adequate internal controls. The company had improperly recorded $17.9 million in revenue from a contract by creating invoices associated with unresolved claims that had not yet been delivered when the revenue was recorded.


Fictitious revenue

Another common revenue recognition scheme is recognizing fictitious revenue. For example, a company may falsely inflate its earnings by recognizing revenue related to fake contracts or other nonexistent sales. Most recently, an internal investigation at Luckin Coffee, a company with a $3 billion market capitalization at the time, revealed that it had recognized $300 million in fictitious revenue in 2019. News of the fraud caused the company’s stock price to plummet overnight.

Fictitious revenue SEC enforcement actions:

  • In SEC v. Longfin Corp. and Venkata S. Meenavalli, the SEC alleged that Longfin and Meenavalli reported over $66 million in sham revenue, comprising over 90 percent of Longfin’s total reported revenue for the year.
  • In SEC v. Putnam et al., the commission charged Anicom Inc. and its directors with violating federal securities laws after the company falsely reported millions of dollars of nonexistent sales to inflate net income by more than $20 million. The SEC alleged Anicom included in its financial statements millions of dollars in sales to a fictitious customer, SCL Integration.
  • In the Matter of FCA US LLC, et al., the SEC alleged Michigan-based automaker FCA paid dealers to report fake sales and maintained a “cookie jar” database of unreported, actual sales. The company claimed to have a four-year, uninterrupted streak of sales growth, where in reality the streak ended after fewer than two years. In months when the growth streak would have ended, FCA used the “cookie jar” to report previous sales as though they were new. This accounting scandal resulted in FCA agreeing to pay $40 million to settle the charges.


Channel stuffing

Channel stuffing is an improper revenue recognition practice in which a company fraudulently inflates its sales by sending excessive amounts of products to its distributors ahead of demand. This practice typically occurs near the end of reporting periods when a company needs to increase its revenues to meet financial projections and market expectations. A company will oversell inventory to distributors in amounts that far exceed the public’s demand for the products and prematurely recognize revenue on future sales.

Channel-stuffing SEC enforcement actions:

  • In SEC v. Symbol Technologies Inc., the SEC obtained a $131 million judgment against manufacturer Symbol Technologies Inc. for fraudulent revenue-recognition practices, including quarter-end “stuffing” of Symbol’s distribution channel to help meet revenue and earnings targets imposed by its CEO.
  • In SEC v. Bristol-Myers Squibb, biopharmaceutical company Bristol-Myers Squibb agreed to pay a $150 million fine for selling excessive amounts of pharmaceutical products to its wholesalers ahead of demand in order to falsely inflate earnings. This resulted in the company improperly recognizing revenue from $1.5 billion in sales to its two largest wholesalers. In addition, the SEC filed charges against two former Bristol-Myers officers for the fraudulent earnings management scheme.


Third-party transactions

Companies may also inappropriately recognize revenue through improper or fraudulent third-party transactions. The transactions that are most susceptible to fraud include bill and hold sales, consignment sales, side letter agreements and other contingency sales.

Third-party transactions SEC enforcement action:

In the Matter of Alere Inc., the SEC alleged that the company improperly recognized revenue from “contingent arrangements, bill and hold transactions, and sales where product was stored at a third-party’s warehouse.” In total, these sales arrangements led the company to improperly recognize approximately $24 million earlier than permissible under GAAP.


Fraudulent management estimates

A company’s management may improperly adjust and inaccurately report accounting estimates to favorably impact financial statements. For example, management may use inappropriate methodologies to determine and report write-offs or other key metrics, resulting in inaccurate accounting and misstatement of income.

Fraudulent management estimates SEC enforcement action:

In the Matter of Computer Sciences Corporation et al., Computer Sciences Corporation agreed to pay $190 million to settle charges that the company engaged in wide-ranging accounting and disclosure fraud. The SEC alleged that the company materially overstated its earnings and concealed from investors significant problems with its largest contract. According to the SEC’s order, the company’s former finance director prepared a fraudulent accounting model in which he included false assumptions to avoid reporting a negative hit to the company’s earnings.


Improper capitalization of expenses

Companies should classify the costs of expenditures as assets or expenses in their financial statements. Improper capitalization of expenses occurs when a company capitalizes current costs that do not benefit future periods. By doing so, a company will understate its expenses in the period and overstate net income. The most well-known example of this scheme involved WorldCom, in which the company overstated its net income by more than $9 billion by, among other accounting tricks, improperly capitalizing operating expenses.

Improper capitalization of expenses SEC enforcement action:

In SEC v. Penn West Petroleum Ltd. et al., Penn West, a Canadian-based oil and gas company, agreed to pay $8.5 million in civil penalties for fraudulently moving hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts. This accounting fraud artificially reduced the company’s operating costs by as much as 20 percent in certain periods. The object of the scheme was to deceive investors about a key publicly reported metric concerning the cost of oil extraction and processing needed to sell a barrel of oil.


Other improper expense recognition schemes

In addition to improperly capitalizing expenses, a company may use other expense recognition schemes to inappropriately overstate net income. For example, a company may falsely inflate its net income in a period by improperly eliminating or deferring current period expenses; by allocating more costs to inventory than cost of goods sold; by creating excess reserves by initially over-accruing a liability in one period (also known as “cookie-jar” reserves) and then reducing the excess reserves in later periods; by understating reserves for bad debt and loan losses; or by failing to record asset impairments.

Improper expense recognition SEC enforcement action:

In SEC v. Celadon Group, Inc., truckload shipping company Celadon engaged in fraudulent third-party transactions to overstate income and earnings and avoid recognizing at least $20 million in impairment losses and charges. This accounting scandal resulted in the company significantly overstating its pre-tax and net income and earnings.


Misleading forecasts or projections

A company may issue misleading forecasts to avoid disclosing a known, increased risk of missing key financial goals or metrics that investors rely on to evaluate financial statements. Even when a company becomes aware of an increased risk of missing the projections, public statements may reaffirm the original projections, in violation of securities laws. The Securities Act of 1933 prohibits untrue statements or omissions in the offer or sale of securities.

Misleading forecasts or projections SEC enforcement action:

In the Matter of Walgreens Boots Alliance Inc. et al., the SEC charged the company with misleading investors during Walgreens’ two-step merger with Alliance Boots. The SEC alleged that after the first step of the merger, the company internally forecast an increased risk of missing its yearly earnings projection but publicly reaffirmed its original projection. Walgreens Boots Alliance paid $34.5 million to settle the claims related to this accounting scandal.


Misleading non-GAAP reporting

While companies may use non-GAAP reporting metrics where GAAP figures do not fully portray their financial condition, they must report non-GAAP metrics accurately. A company might manipulate non-GAAP measures to reflect stronger growth or higher earnings. Since 2013, there has been a dramatic increase in publicly traded companies reporting non-GAAP numbers in their financial statements.

Misleading non-GAAP reporting SEC enforcement action:

In the Matter of Brixmor Property Group Inc., the SEC charged real estate investment company Brixmor and four former senior executives with manipulating a non-GAAP metric that analysts and investors relied on to evaluate the company’s financial performance. The SEC alleged that to meet public growth targets, the ex-executives adjusted the company’s same property net operating income, a key metric, in violation of the antifraud and books and records provisions of the Exchange Act and Rule 100(b) of Regulation G, which relates to reporting non-GAAP performance measures. The company agreed to pay $7 million to settle the charges, and in a parallel action, the U.S. Attorney’s Office for the Southern District of New York filed criminal charges against the ex-executives.


Inadequate internal controls over financial reporting

The Exchange Act requires all companies reporting to the SEC to devise and maintain a system of internal controls over financial reporting, which must provide reasonable assurance that transactions are properly recorded and financial statements are prepared in accordance with GAAP. A wide range of accounting scandals violate this requirement.

Inadequate internal financial controls SEC enforcement action:

In SEC v. Monsanto, the commission announced that Monsanto agreed to pay an $80 million penalty for inadequate internal accounting controls. According to the SEC’s order, the company failed to properly account for millions of dollars in rebates offered to retailers and distributors of Roundup after generic competition had undercut its prices and caused the company to lose significant share in the market. Monsanto booked substantial amounts of revenue from sales incentivized by the rebate program but failed to recognize all of the related program costs at the same time. A whistleblower received a more than $22 million award for disclosing this fraud to the SEC.

Jason ZuckermanMatthew Stock and Katherine Krems are whistleblower attorneys at Zuckerman Law in Washington, D.C.




Financial execs take wait and see approach amid coronavirus uncertainty

By Michael Cohn


Financial executives are hesitant about their organization’s future working capital, demand for products and services, and talent retention, according to a new survey.


The economic downturn, tempered by record performance in the stock market, has fueled uncertainty about the economy. Despite the gains on Wall Street, many Main Street businesses are hurting because of the COVID-19 pandemic, and many companies around the country are still not seeing the demand they did pre-pandemic.


The quarterly survey, by Financial Executives International’s Financial Education & Research Foundation, found that 44 percent of respondents indicated working capital balances declined in the second quarter of this year compared with 33 percent in the first quarter. The 11 percent quarter-over-quarter increase demonstrates a profound erosion of corporate cash flow.

In response to declines in their companies’ working capital, financial executives indicated a preference for pausing different types of business activities, as opposed to canceling or cutting them.


 “We’re closely monitoring our member sentiment toward financial management since the onset of the pandemic,” said FEI and FERF president and CEO Andrej Suskavcevic in a statement Monday. “What we’ve observed is the emergence of a ‘wait and see’ approach driven by lingering economic uncertainty. This is causing a logical shift to capital rationing as companies ramp select business activities while pausing others.”

Compounding financial executives’ ‘wait-and-see’ approach to long-term decision making is the greater difficulty with forecasting amid the uncertainties of the pandemic. Two-thirds (66 percent) of the survey respondents cited forecasting as an accounting area in which their teams struggled the most. Uncertainty around the effects of COVID-19 and the timing around a possible vaccine only increase the uncertainty.


“Companies are likely to continue to face challenges related to developing forecasts,” said Andy Elcik, national managing partner of accounting, reporting and advisory services at Deloitte & Touche LLP, in a statement. “Companies are often using different scenarios as part of their forecasting process and in the current environment the inputs and outputs of the various scenarios have a high degree of variability. To manage through this some companies are using rolling 12-month forecasts to help assess the evolving economic landscape.”


Some of the 170+ financial executives who were polled said their organizations are focusing on rationing cash and that cash-related financial metrics have become highly scrutinized key performance indicators. Yet despite the cash constraints, 62 percent of the respondents see a consistent appetite for mergers and acquisitions as the pandemic’s disruption has shifted equilibrium in favor of future deal making.


In the first quarter, weak demand for products and services was among the management issues ranked lowest in priority at 32 percent, compared to 51 percent of respondents who named it a top concern in the second quarter. Some financial execs see this as a significant management issue, while others see it as less so.


A significant shift in talent retention emerged among the survey respondents. In the first quarter of the year, 46 percent of the respondents said they were seeking to decrease their organization’s headcount, with only 16 percent planning to increase it. In the second quarter, 55.7 percent of respondents anticipated maintaining their headcount, with only 24.5 percent now saying workforce reductions are planned.


An average 50 percent of staff across all organizations surveyed plan to work remotely for the rest of the fiscal year. Organizations operating in the Northeast and West Coast aim to have a higher percentage of employees work from home, at 51.52 and 64.71 percent respectively.




Make the most of your RMD vacation

With no required minimum distributions, you can save on taxes or pay it forward.


Key takeaways

  • Required minimum distributions are paused for 2020, so those over 72 may have less taxable income for the year.
  • If you decide to stop your withdrawals, or take out less than would have been mandated, it could significantly change your income tax burden.
  • What you choose to do depends on your overall financial situation.


If you are headed for a significantly lower tax bill in 2020 because you don't have to take money out of your retirement accounts, what are your plans for the sudden savings? You could pocket the difference, or you could pay it forward to yourself and save even more down the road, depending on your situation.


As part of the CARES Act for economic distress caused by COVID-19, Congress put a one-year halt for 2020 on required minimum distributions (RMDs) from tax-deferred retirement accounts like traditional IRAs, 401(k)s, and other qualified accounts that are subject to RMDs. The IRS says that if you had already taken money out before the rule changes and want a do-over, you have until the end of August 2020 to put it back in your accounts.


Typically, Americans 72 or older must make withdrawals from these accounts based on a formula that divides the balance of your accounts at the end of the previous year by a factor based on your age.* The idea is that you put the money into the account before paying taxes on it, and the government wants its tax cut after waiting so long. Fidelity Investments data shows that about 1.8 million personal investing customers are in this phase currently.


Say you're 73 and have about $1 million saved: You'd have to withdraw roughly $40,000 for the year as a required distribution, which will shift over time as you age and deplete the account. You pay income tax on what you withdraw, so this impacts your tax bracket, how much tax you pay on your Social Security benefit and capital gains, and the cost of your Medicare premiums.


"Taking a break from a year of taxes on a sum like $40,000 can be a real cost savings—for many clients, it's $8,800 or more, and that's not counting state and local taxes," says Matthew Kenigsberg, vice president of investment and tax solutions at Fidelity.


What you decide to do in this situation depends greatly on your personal financial situation. Here are some common scenarios.


Do nothing


People usually jump at any offer of tax savings, so the prospect of an RMD vacation can be pretty enticing. If you have enough savings or other resources to get through the year without making withdrawals, you may be able to lower your current tax bill.


"This strategy makes the most sense when you think your tax rate will be even lower in the future, or it will be even lower for the person who will inherit the account after you die," says Mitch Pomerance, CFP® CFA, a Fidelity advisor based in Danvers, Massachusetts.


Tip: If your RMDs were set to withdraw automatically, it's a quick process to turn them on and off, either online or by calling. Log on to your accountLog In Required for details on doing so at Fidelity.


Take what you need


Most people withdraw money from their retirement accounts, regardless of whether the government tells them to, because they live off that money.


For Marilyn Arnold, a 72-year-old from Missouri, the RMD vacation means simply that she can withdraw what she needs and leave the rest alone. "I'm doing a small amount, because my husband has health issues and needs medication," says Arnold, who continues to work at her own design business.


Cut taxes later


With some strategic planning, you could use this year as an opportunity to have less taxable income in future years. One way to do this is with a conversion from a traditional IRA or 401(k) to a Roth IRA or a Roth 401(k).

If you were that 73-year-old who has $1 million saved for retirement, instead of taking an RMD for 2020, you could withdraw $40,000 and invest it in a Roth IRA. You would need to pay income tax on the amount you withdraw.


The amount converted to a Roth grows tax-free, is not subject to required minimum distributions while you're still the owner, and it can be worth more, on an after-tax basis, to heirs who inherit it. A financial professional can help you assess whether you could benefit from this scenario.


"No performance is guaranteed, but if you think your tax rates in later years will be higher than they are now, Roth conversion could help you reduce your taxes in the future," says Kenigsberg.


Read Viewpoints on Roth IRA conversion: 7 things to know


Get even more complex


Depending on your financial situation, there may be more options. If you have little taxable income, but you have investments held in taxable accounts with embedded capital gains which no longer fit in your overall portfolio strategy, you may want to sell some of those off in a year when you have a zero long-term capital gains tax rate. In 2020, for those joint filers, the zero rate on long-term capital gains applies to those with taxable income of $80,000 or below, so for many, skipping the RMD may mean that their incomes are low enough to realize long-term gains without paying capital gains taxes. For singles, the cutoff is $40,000.


You might also want to reconsider your charitable giving strategy. If you normally donate to charity directly from your IRAs (such gifts are called Qualified Charitable Distributions), you may want to pause this year and instead donate appreciated securities from your taxable accounts to charities instead. In general, other things equal, it's best to make gifts from your traditional IRA when your income is relatively high, not when it's down because of the RMD vacation.


Next steps


The bottom line is that somebody is going to have to pay taxes on your tax-deferred retirement accounts at some point—either you or your heirs. You can avoid it this year, but that doesn't make the liability go away. If you need help deciding what's best for your situation, a financial advisor and a tax professional can help you sort out which options to choose.




Game plan now for potential higher taxes

By Roger Russell


Whether or not you believe the polls, it’s evident that the November 2020 election may usher in a change in the executive and legislative branches that could result in higher taxes for many. As a result, it makes sense for tax professionals to plan and take any actions that might be available to lessen potential adverse effects on their clients.


New presidents typically do get their tax plan enacted during their first year, according to Mark Luscombe, a CPA, attorney, and principal analyst for Wolters Kluwer Tax & Accounting.


“They have a pretty good record of getting things through during their first year in office,” he said. “If Biden wins and gets his tax plan enacted, it’s likely that it will bring higher taxes. But assuming it’s passed in 2021, any legislation probably won’t be effective until 2022. Congress seems to be hesitant to make tax hikes retroactive.”


Among other items, a tax increase proposed by Biden would restore the 39.6 percent rate for income over $400,000, and the elimination of capital gains treatment and qualified dividend preference for income over $1 million, Luscombe noted, adding, “He would also limit total itemized deductions so they do not exceed 28 percent. People in brackets over 28 percent would basically not get more than 28 percent of the benefit of itemized deductions.”


Taxes either way

Whoever wins the presidency, it is likely that higher taxes are in the offing, predicted Glenn DiBenedetto, a CPA and director of tax planning at New England Investment & Retirement Group.


“It seems inevitable with COVID that we’re looking at a potential raise in taxes,” he said. “California has proposed an increase in their tax rates via a progressive surcharge on seven-figure earners which would increase the tax rate on the highest bracket from 13.3 percent to as high as 16.8 percent in 2021, retroactive to the first of the year.”


The potential return to the pre-Tax Cuts and Jobs Act rates — which is slated to occur in 2026 even if not accelerated by the election results — makes tax bracket planning even more necessary for 2020, according to DiBenedetto: “It is important to project what bracket a taxpayer will be in two or three years from now. A lot of high-income people might look at accelerating income into 2020 in the event there is any political change.”

“Also consider maximizing the 2020 distributions from retirement accounts to take advantage of the benefits of a lower tax bracket,” he suggested. “For example, you could take a distribution in 2020 despite potentially having required minimum distributions waived under the SECURE Act.”


Current long-term capital gains and qualified dividends are taxed at 0 percent, 15 percent, or 20 percent, based on taxable income, he noted. “Taxpayers should review harvesting long-term gains to lock in the current low rates which will potentially increase,” DiBenedetto said.


The 12.4 percent Social Security tax for income above $400,000 would take a real bite out of the income of wealthy individuals, he observed. “Long-term capital gains and qualified dividends would be subject to tax at the ordinary income rate of 39.6 percent for those with income over $1 million, and the step-up in basis at death would be eliminated. Moreover, estate taxes would be headed higher with the reduction in the lifetime estate and gift tax exemption significantly reduced from its current amount,” he said.


“Estate taxes currently apply to the amount an estate’s value exceeds $11.58 million for a single person or $23.16 million for couples,” he said. “Although they are scheduled to sunset in 2026, given the mounting pressure to increase taxes, these exemption amounts could be lowered before they sunset.”


Therefore, DiBenedetto advised, “If a taxpayer is considering making a gift that would use up part or all of the exemption, now is the time to do it.”


Tate Taylor, a partner and chair of the private client services practice at Tampa-based Trenam Law, agreed. “The planning that we’re doing targeted to the high-net-worth community has its eye focused on elements of the Biden tax plan that would reduce the lifetime estate and gift tax exemption from its current level to those in place in 2009,” he said. “That $8 million difference in exemption amount currently translates into about $3.2 million in estate tax. People have started this year, if they have enough money, to make large gifts during life that would use up that exemption now, while it’s still available.”


Trust in trusts

One suggestion made by a number of professionals is to transfer assets to an irrevocable trust in return for a promissory note. If Biden wins the presidency, the transferor would forgive the promissory note.


“If Biden wins you’re locking in a gift by forgiving the note,” explained DiBenedetto.


“It’s a viable option,” agreed Taylor. “A lot of planners are doing this. It’s a way to put yourself in the position of making a last-minute decision of whether or not you want to pull the trigger. You can make a gift at the stroke of a pen at the end of the year.”


The other major policy shift in the Biden tax plan is the elimination of the step-up in basis at death, which allows heirs of the deceased to sell assets using the same basis that the decedent had.


“It’s something to take into consideration when making the decision as to when to sell assets,” said Taylor. “You can’t plan for death, but you can, in your investment priorities methodology, take into account the fact that the heirs might not have the same basis as the decedent when they go to sell the asset they inherit. It may be advisable to sell the asset before death to wipe out any gains to the heirs.”


“In a lot of ways, right now is a good time to do transfer tax planning,” agreed Ed Renn, senior equity partner at international law firm Withers. “With the exception of the stock market, we generally have depressed asset values. We’re seeing significantly less appetite for risk, resulting in bigger discounts for marketability. To put a number on it, if you expected a 30 percent discount in January 2020, it would be at 45 percent now.”


“The reality is that planning is not a simple process,” Renn said. “If you want a particular child to run a business, that has to be addressed now.”


And there’s no certainty that any increases won’t be retroactive to Jan. 1, 2021, Renn cautioned. “There are only 59 days between the election and Jan. 1, 2021,” he said. “A ‘blue wave’ — the White House, Senate and House all going to the Democrats — could result in increased rates effective as of that date. If the Republicans hold on to enough Senate seats, this won’t happen, but if the Democrats take everything, there will be a major reset in the way taxes will be handled and who will pay them.”


For details of the presidential candidates' tax policies for individuals, see our comparison.





Biden lays out vision in convention speech, including tax changes

By Michael Cohn


Democratic presidential nominee Joe Biden described his vision if he wins election against Donald Trump in November, expressing optimism and hope about overcoming the coronavirus, the economic crisis, climate change, racial divisions and other challenges during his acceptance speech at the virtual Democratic National Convention.


Speaking from a stage in Wilmington, Delaware, on Thursday night, Biden also briefly described his tax agenda in contrast to what would happen if Trump is re-elected in November. “If this president is re-elected, we know what will happen,” he said. “Cases and deaths will remain far too high. More mom-and-pop businesses will close their doors for good. Working families will struggle to get by, and yet, the wealthiest 1 percent will get tens of billions of dollars in new tax breaks.”


Biden discussed his plans for expanding health care, building on the Affordable Care Act that he helped pass in 2010 as vice president in the Obama administration, along with plans for building bridges and roads, improving child care and elder care, making college more affordable, and dealing with climate change while creating more jobs in the clean energy industry.

“And we can pay for these investments by ending loopholes and the president's $1.3 trillion tax giveaway to the wealthiest 1 percent and the biggest, most profitable corporations, some of which pay no tax at all,” Biden added. “Because we don't need a Tax Code that rewards wealth more than it rewards work. I'm not looking to punish anyone. Far from it. But it's long past time the wealthiest people and the biggest corporations in this country paid their fair share.”


Biden also took aim at Trump’s recent executive orders and memoranda, which included one that defers payroll taxes that are used to fund Social Security and Medicare, vowing to defend the programs.

“For our seniors, Social Security is a sacred obligation, a sacred promise made,” said Biden. “The current president is threatening to break that promise. He's proposing to eliminate the tax that pays for almost half of Social Security without any way of making up for that lost revenue. I will not let it happen. If I'm your president, we're going to protect Social Security and Medicare. You have my word.”


Trump responded on Twitter to Biden’s speech, tweeting, “In 47 years, Joe did none of the things of which he now speaks. He will never change, just words!”


Biden concluded his speech on a hopeful note. “May history be able to say that the end of this chapter of American darkness began here tonight as love and hope and light joined in the battle for the soul of the nation,” he said. “And this is a battle that we, together, will win, I promise you. Thank you, and may God bless you, and may God protect our troops.”


(For potential post-election planning tips, see our story. For a comparison of Biden and Trump’s tax policies, click here.)




IRS previews draft version of 1040 for next year

By Michael Cohn


The Internal Revenue Service has released a draft version of the Form 1040 for tax year 2020 with several significant changes probably in store for next tax season.


They include moving the question about virtual currency from the attached Schedule 1 to near the top of the main form, right under the name and address, asking, “At any time during 2020, did you receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency?” The question comes at a time when the IRS has made it more of a priority to crack down on cryptocurrency investors who haven’t been reporting their gains on their tax filings, including by issuing summonses to major cryptocurrency exchanges like Coinbase and Bitstamp in recent years seeking information on their customers who trade in digital currency such as Bitcoin and Ethereum (see story).


Another big change, as Kelly Phillips Erb of Forbes noted, is the inclusion of a question about charitable contributions on the main tax form for taxpayers who claim the standard deduction. Normally, taxpayers who claim the charitable deduction have to itemize it on Schedule A, but the CARES Act this year includes a provision for taxpayers to deduct up to $300 in charitable contributions even if they’re only claiming the standard deduction. That’s why there is now a line 10b for “charitable contributions if you take the standard deduction” on the draft Form 1040. Instructions will be provided for taxpayers and tax preparers, according to the form.


The flip side of the form includes a number of changes, including splitting the federal income tax withheld line into separate entries from W-2, 1099 and other forms, as opposed to a single line for federal income tax withholding. This suggests to Erb that the IRS may be planning to do extra scrutiny of gig workers and the self-employed.

A new line has been added to page 2 for the “recovery rebate credit,” which will be reporting the economic impact payments or stimulus checks that went out from the IRS this year as a result of the CARES Act. That too will be explained in the instructions for Form 1040, and Erb says there will be a separate reconciliation schedule that will carry over to that line on the form.


The “Amount You Owe” section of the form includes a new cautionary note, saying, “Schedule H and Schedule SE filers, line 37 may not represent all of the taxes you owe for 2020. See Schedule 3, line 12e, and its instructions for details.” Schedule3, line 12e is new, according to Erb, and corresponds to another provision of the CARES Act allowing employers to defer their portion of the payroll tax for Social Security.


The form so far does not seem to include a line for the new payroll tax deferral for the employee’s share of Social Security taxes under President Trump’s recent executive order or memorandum. The draft form is likely to change before it’s finalized, though, as the IRS receives comments from the tax practitioner and accountant communities, as well as others.





Election 2020: Trump vs. Biden on corporate tax policy


The Democratic and Republican conventions have put a spotlight on this fall's presidential election, and with that in mind, Top 10 Firm Crowe has released this handy at-a-glance summary of the two candidates’ proposed policies for corporate taxes. (See the firm's summary of their tax policies for individuals.)




Lower the corporate tax rate from 21% to 20%.


Raise the corporate tax rate from 21% to 28%.

Require C corporations with over $100 million in book income to pay the greater of normal corporate tax liability or 15% of book income.



Expand the meal and entertainment expense deduction.

Extend the 100% bonus depreciation that is scheduled to phase out beginning in 2023.

Retain the current deduction for research and development that is scheduled to expire after 2021.

Establish tax deductions for small businesses, restaurants, and the tourism industry as they look to rebuild after the pandemic

Eliminate all deductions for expenses to advertise prescription drugs.

Increase the depreciable life of rental real estate.

Eliminate the deferral of capital gains from like-kind exchanges for real estate.

Establish incentives for opportunity zone funds to partner with nonprofit or community-oriented organizations, and jointly produce a community benefit plan for each investment. Require reporting, public disclosure of community impact, and Treasury oversight.




Enact a 10.5% tax rate for companies that bring back to the U.S. supply chains for medicines and related products.

Double the global intangible low-taxed income rate to 21%.

Impose sanctions on countries that “facilitate illegal corporate tax avoidance and engage in harmful tax competition.”


TAX CREDITS (other than individual, energy, and health care)


No proposal

Expand the new markets tax credit and make it permanent.

Establish the manufacturing communities tax credit, and fund the credit for five years to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure.

Expand the work opportunity tax credit to include military spouses.

Expand the low-income housing tax credit.

Establish a workplace childcare facility tax credit of up to 50% of an employer’s first $1 million in costs for qualified on-site childcare.




Billionaire Robert Smith fighting U.S. criminal tax inquiry

By David VoreacosNeil Weinberg


When billionaire Robert Smith ended his 2019 Morehouse College commencement speech by vowing to pay off student debt for the entire graduating class, cheers of “MVP, MVP, MVP!” rose from students and faculty on the Atlanta campus.


What the audience didn’t know was that Smith was harboring a financial secret. He was being pursued by Justice Department prosecutors and Internal Revenue Service agents for potential tax crimes, according to four people familiar with the matter.


Federal authorities have spent four years examining whether Smith failed to pay U.S. taxes on about $200 million in assets that moved through offshore structures, some of those people said. Smith hasn’t been charged, and prosecutors may conclude he owes no taxes on those assets.

The matter hinges largely on whether Smith was actually the beneficial owner of Caribbean entities that received proceeds from his company’s first private equity fund, according to two of the people. A portion eventually flowed through the offshore entities into a U.S. charitable foundation where Smith is president and founding director.


U.S. citizens are required to pay taxes on income anywhere in the world. When the IRS catches mistakes on a return, taxpayers generally rectify the problem and reach a civil settlement. Prosecutors can bring criminal cases, however, against those who willfully fail to pay taxes or fail to declare their foreign assets.


Smith is trying to persuade the Justice Department to forgo criminal charges and resolve his case with a civil settlement, according to three of the people. A conviction could send him to prison and force him out of Vista Equity Partners, a money management firm with $65 billion in assets that has brought him fame and a luxe lifestyle.


Part of his defense rests on a reported pledge by the private equity fund to direct proceeds to charity. If prosecutors determine that the proceeds were designated for charity all along, it could bolster the argument that Smith was never the beneficial owner and not liable for taxes.


Recently, Smith has talked to prosecutors about possibly cooperating with their investigations in exchange for leniency, one of the people familiar with the matter said.


That’s because prosecutors are building what may be a larger tax case against a Smith associate — Robert T. Brockman, a Houston businessman — according to Bermuda court records and people familiar with the matter. The Brockman investigation was reported by the Sydney Morning Herald, though the inquiry into Smith hasn’t been disclosed previously. The two men’s business connections involve a jumble of offshore entities, trusts and foundations, much of it opaque to anyone without subpoena power.


In 2000, Brockman helped provide $1 billion for Smith to begin a private equity firm, a person familiar with the matter said. The funds came out of an entity held by a charitable trust based in Bermuda in which Brockman is a beneficiary, the person said.


The men met through business dealings at Goldman Sachs Group Inc. and shared a passion for the potential of software in business. Brockman made his name with software widely used by auto dealerships and is the chairman and chief executive officer of Reynolds and Reynolds, based in Dayton, Ohio. He didn’t respond to requests for comment sent by email or made through his company and its outside public relations firm.


Smith and Vista declined to comment for this article. A spokesman for the Justice Department declined to comment on whether an investigation exists. An IRS spokesman didn’t respond to emails seeking comment.

The Justice Department has discretion in deciding whom to charge, weighing factors such as the prosecution’s evidence, the strength of the defense and the way a jury would likely respond to the facts. Smith, a prominent Black businessman and philanthropist, may be viewed sympathetically by a jury in a time of protests for racial justice, lawyers said.


“The issue of jury appeal is often considered by prosecutors in cases that are a close call,” said David S. Weinstein, a former federal prosecutor in Miami who isn’t involved in the case. “If 12 jurors believe they want to acquit a defendant based on something other than the evidence, that’s their inherent right. They may believe it’s not the right time or place to bring a case against a particular defendant.”


As prosecutorial scrutiny of Smith has intensified the last few years, so has his wealth and his public profile, evidenced by his $34 million pledge to the families of nearly 400 Morehouse graduates. In an interview with Business Insider, Smith said the goal of his gifts is “liberating the human spirit.”


The co-founder of San Francisco-based Vista, Smith chairs Carnegie Hall and has received awards from Harvard, Cornell and Columbia universities. He’s graced the cover of Forbes magazine twice and was named to Bloomberg’s 50 people who defined 2019. Smith is also the only Black American who’s signed Warren Buffett’s Giving Pledge. In the past five years, his personal net worth has nearly tripled, to $6 billion, Bloomberg data indicates, making him the wealthiest Black person in the country.


Over that same period, Smith and the U.S. charitable foundation he helped create have given away at least $300 million. He used his own money to pay off the Morehouse debt and to donate $20 million to the Smithsonian National Museum of African American History & Culture. This year, he joined Tyler Perry and Floyd Mayweather in helping to pay funeral expenses for George Floyd.


The foundation, of which he is president and founding director, gave $54 million to the National Park Foundation to acquire the homes of Martin Luther King Jr. and other prominent African-Americans, $48 million to the United Negro College Fund and $37 million to the Susan G. Komen Foundation, according to its U.S. tax filings. Proceeds that flowed from his first private equity fund through the offshore entities were ultimately transferred to the foundation that made the gifts, the tax filings show.


Two years ago, Forbes offered this glimpse of Smith’s charitable drive. “I will never forget that my path was paved by my parents, grandparents and generations of African-Americans whose names I will never know,” Smith wrote when he signed the Giving Pledge to contribute half of his net worth to philanthropic causes during his lifetime. “We will only grasp the staggering potential of our time if we create on-ramps that empower ALL people to participate, regardless of background, country of origin, religious practice, gender, or color of skin.”

From seemingly different backgrounds, Smith, 57, and Brockman, 79, bonded two decades ago. The son of two high school principals in a predominantly Black neighborhood, Smith told his Morehouse audience that he got a break in grade school when he rode a bus across Denver to a wealthy neighborhood with the sort of quality education unavailable to many of his neighbors.


As a young man with a degree from Cornell, he found success as a chemical engineer at Goodyear Tire and Rubber and then at Kraft General Foods. An MBA from Columbia followed, and Smith realized he could make more money on Wall Street. After what he described as more than 100 interviews with banks, he joined Goldman Sachs in 1994 in mergers and acquisitions. Goldman later moved him from New York to be a technology investment banker in Silicon Valley. His star was rising at Goldman when he began working with Brockman, a Goldman client and code-writing whiz.


Brockman, a former Marine and IBM salesman, started his own software company in 1970 and ultimately gobbled up several other companies. Though the Texan generally shuns the spotlight, he’s also a philanthropist, creating a scholarship program at Texas A&M and serving on the board of the Baylor College of Medicine.

He decided to make a Texas-size bet on Smith, helping to lure the investment banker out of Goldman Sachs in his late 30s. Smith set up Vista with two partners in San Francisco.


Its first fund, Vista Equity Fund II, had a single limited partner, Point Investments, a British Virgin Islands entity, which made the $1 billion commitment in 2000, a person familiar with the matter said. Point Investments was held as part of the A. Eugene Brockman Charitable Trust, named for Brockman’s late father, according to Bermudian court records.


The ownership of the trust was complex, but Brockman is identified in U.K. court records as a beneficiary. The arrangement is typical of those used to help rich Americans lower their taxes. It was owned by another offshore entity, the St. John’s Trust Company, which is at the heart of the U.S. investigation, Bermudian court records indicate.


Over time, Smith, Vista and Brockman grew more intertwined. In 2006, the company that Brockman had founded 36 years earlier launched a buyout of a larger rival, Reynolds and Reynolds. Equity financing was provided by Goldman Sachs’s private equity arm, GS Capital Partners; Smith’s Vista Equity Fund II; and another Brockman trust called Spanish Steps. Prosecutors have studied that transaction, according to a person familiar with the matter.


Back at Vista, Smith racked up an astounding winning streak. In all, he’s completed more than $120 billion in deals and produced some of the highest returns in the industry over the last two decades. Vista has started a score of private equity, debt and hedge funds. Its clients include big investors like the state pension funds in New York and Illinois and the City of Los Angeles.


Life grew more complicated for Smith in 2013 when his wife filed for divorce, citing adultery. Jamaican-born Suzanne McFayden had met Smith while studying French literature at Cornell. They married in 1988 and had three children.


Experts on both sides of the divorce pored over the family finances. In 2014, Smith approached the IRS seeking amnesty from prosecution under a program used by more than 56,000 Americans who failed to report offshore assets, according to two of the people familiar with the matter. Through the program, the IRS collected more than $11 billion in back taxes, fines and penalties, while learning who enabled offshore tax evaders.


But the IRS rejected Smith, according to people familiar with the matter. The agency typically turned down taxpayers if it already knew they had undeclared offshore accounts.


The divorce was final in 2014. The next year, Smith married Hope Dworacyzk, Playboy’s 2010 Playmate of the Year and a “Celebrity Apprentice” participant until Donald Trump fired her. For the wedding, at a five-star hotel along Italy’s Amalfi Coast, the couple’s seven-month-old son floated down the aisle atop an artificial cloud. John Legend and Seal entertained the crowd.


Smith also sold about one-third of Vista to Dyal Capital Partners beginning that year for an undisclosed amount.

A criminal inquiry soon emerged. In 2016, near the end of the Obama administration, prosecutors sent out subpoenas from a San Francisco grand jury to witnesses, people familiar with the matter said. The investigation is being conducted by the Justice Department’s Tax Division and the U.S. attorney’s office for the Northern District of California. A veteran Tax Division prosecutor, Corey Smith, is working on both the Smith and Brockman cases, the people said.


Among other matters, investigators have focused on the winding down of Smith’s first fund in 2014, the year of his divorce, the people said. Two offshore entities began transferring $247 million in proceeds from Vista Equity Fund II to Fund II Foundation, the charity where Smith is president.


One of those offshore entities was St. Kitts- and Nevis-based Flash Holdings LLC, tax filings show. At issue is who beneficially owned Flash, the people said. Also under scrutiny is an unusual agreement driving the transfer to the foundation, the people added. The foundation has said a promise was made in 2000 by Vista’s first fund to transfer its remaining assets to charity after covering its obligations to its limited partner. It’s unclear whether there’s a written agreement from the fund’s inception outlining the pledge.


None of this artful financial work could have been achieved without advisers and lawyers. Prosecutors found at least one and applied pressure a couple of years ago.


Evatt Tamine, an Australian lawyer, lived in Bermuda and worked for various offshore trusts and companies. Tamine was a director of St. John’s Trust Company, which oversaw Brockman’s trust. His wife, Sophie Tod, also an attorney, became a director of the foundation led by Smith.


The Tamine family was in the U.K. when Bermuda police and IRS agents raided their home in September 2018 at the request of the U.S. Justice Department. A housekeeper met the agents, who spent hours seizing documents and encrypted electronic devices, according to a person who described the scene. Prosecutors later raided a storage locker, court records show.


Ultimately, Tamine received immunity to help U.S. prosecutors unravel the financial matters, according to court records. He has testified three times before the grand jury in San Francisco and has provided emails and other documents to prosecutors, according to a person familiar with the matter.


Court actions followed in Bermuda and the U.K. over which of the lawyer’s documents were protected by privilege, whether Tamine stole money and who should be appointed trustees.


The scope of the U.S. investigation emerged at a court hearing in Bermuda on Feb. 20. A Bermudian lawyer, Jan Woloniecki, spoke on behalf of the Justice Department. He said prosecutors were investigating “a major and very large tax fraud on the United States” that could “set a record” because prosecutors believe $1.5 billion of revenue was concealed fraudulently from the U.S. government.


Woloniecki also said St. John’s Trust had engaged in a “cynical attempt” to block the investigation by attacking Tamine. The trust and related entities have accused Tamine in Bermuda and London courts of stealing $20 million. Tamine‘s lawyers said he “vigorously denied” any suggestion of unlawful conduct.


“Mr. Tamine is an important cooperating witness into a U.S. Department of Justice (DOJ) investigation in relation to Bob Brockman,” a spokesperson for Tamine’s lawyers, Mishcon de Reya, said in a statement. “The bogus allegations of theft were raised by entities associated with Mr. Brockman only after he agreed to assist the DOJ and are clearly designed to undermine his credibility as a witness. Those same entities tried (ultimately without success) to delay access to key documents by Mr. Tamine and the DOJ.”


Speaking on behalf of the U.S. government, Woloniecki said it would be “very damaging to the reputation of Bermuda” if the plaintiffs were to use their claims against Tamine to derail the investigation.


If the U.S. decides to charge Smith or Brockman with tax crimes, their cases could surpass one against another billionaire known for charitable giving. Ty Warner, the founder of the company that makes Beanie Babies, pleaded guilty in 2013 to evading almost $6 million in taxes on $107 million held offshore. It was the largest of 150 cases in a U.S. crackdown on offshore tax evasion.


At Warner’s sentencing, a judge praised his philanthropy and imposed a sentence of probation rather than the nearly five years in prison he faced under a plea agreement. Smith is represented by one of Warner’s former lawyers.

— With assistance from Jonathan Browning




10 cybersecurity practices that create the best remote environment

By Nicole Fluty


As firms work remotely and cloud applications and security become more important than ever, accountants should be thinking about cybersecurity in new ways. As they say, the best defense is a good offense. But what may have worked in the past to protect you from hackers and other security threats is likely no longer sufficient as methods of attack become increasingly more sophisticated. There are, however, many cybersecurity strategies and controls that accounting firms can implement in order to significantly reduce the likelihood of a successful attack and minimize the resulting damage if attackers do gain access to systems. Here are some.


Password requirements

Passwords are the first line of defense against illegal access to systems and information. You need strict requirements for employee passwords that ensure length, complexity and randomness. A system wide requirement should also mandate that employees change their passwords at frequent intervals.


Multifactor authentication policy

Multifactor authentication is one of the best ways to prevent unauthorized access to email accounts and systems. A multifactor authentication policy requires a user to have two pieces of information to gain access, not only a password. This prevents attackers from gaining access even if user passwords or credentials have been compromised.


Role-based action control

Role-based access control is a neutral access policy that restricts every user’s access rights solely on the basis of the role played in the organization, granting specific access to specific roles. Also known as a zero-trust model, this approach restructures access within your firm’s systems based on a “never trust, always verify” philosophy targeted at preventing improper access.


Strong encryption at rest and in transit

Strong encryption is crucial to protecting your data from outside eyes, and you need to be sure that your data is secure regardless of where it is or how it’s being used. Encryption must exist when data is at rest, or simply residing in your system, as well as when it’s in transit, or moving from one location to another. Equally important is knowing who has access to the encryption keys at all times.


Patch management and regular vulnerability scanning

A crucial aspect of security is always knowing what systems are connected to your network and ensuring they are up to date. Regular vulnerability scanning will identify those systems for you, along with any potential vulnerabilities in them. Patch management pinpoints and installs any patches that are missing, confirming that your devices and systems always meet the most current security standards.


Network architecture and boundary protections

Preventing attacks requires understanding the structure of your systems and networks. Network architecture is the physical components of your technology stack and how they are configured, organized and interconnected. Boundary protections are processes for monitoring and controlling communications at the external boundaries of the network to prevent infiltration.


Audit logs

Spotting anomalies in networks and systems requires keeping detailed records of all activity. Audit logs are critical to collecting information on security incidents in order to analyze them, reverse-engineer the attack to identify vulnerabilities and determine whether changes are needed going forward.


Proactive security monitoring with AI behavior-based protection

Proactive security monitoring is crucial to detecting threats before they wreak havoc on your systems. Behavior-based security measures that incorporate advanced AI and machine learning are designed to proactively monitor all activities in order to identify anomalies and deviations from normal patterns and offer a protective response as soon as anything is detected.


Third-party audits and penetration tests

Cybersecurity threats aren’t limited to your own systems. Most accounting firms work with several third-party vendors, including cloud providers, which offer alternate avenues of access to firm systems. Firms should regularly audit those third parties to ensure that their security measures meet firm standards, including running penetration tests to probe if the third party’s defenses are sufficient to notice and prevent simulated attacks.


Backups and other resilience planning

If an attack happens, firms need to have a plan for recovering both data and applications. This requires having backups in place, but your strategy should go even further. IT resilience planning involves implementing tools and applications that will automatically take the necessary steps to protect your data and systems as soon as an issue arises, before backups are even necessary.




Coronavirus affected employee expense trends, especially meals and travel

By Michael Cohn


The novel coronavirus pandemic led to a transition from employer-provided meals to food delivery services arriving at employee homes, as workers all but eliminated their travel expenses, according to a new report.

The Certify SpendSmart report, from expense management software provider Emburse, showed a huge increase in expenses for food deliveries and employee purchases for home offices.


Food delivery services grew 110 percent annually, as DoorDash upped its market share. In contrast, Uber Eats lost significant ground in both market share and the amount of average spending. DoorDash continued its leadership position in the sector, making up 36 percent of expenses submitted, compared to 25.1 percent for Grubhub, 17.1 percent for Uber Eats and 11.5 percent for Postmates.


DoorDash also experienced significant growth in market share, up from 29.5 percent in 2019, while Grubhub declined slightly from 27.3 percent and Uber Eats saw a sharp plummet from 25.6 percent. However, the average amount spent with Grubhub was significantly higher than DoorDash, at $74.52 compared to $57.51, and $34.96 for Uber Eats.

Grubhub also grew its average amount spent by 23 percent year over year, compared with only 6 percent for DoorDash. In contrast, Uber Eats’ average spend shrank by 26 percent year over year.


Travel and hospitality

Business travel all but ceased entirely as a result of the pandemic, but some industries did a better job of maintaining their pricing despite the economic downturn.


In the airline industry, among the five most expensed airlines (American Airlines, Delta Airlines, United Airlines, Southwest Airlines, and Alaska Airlines), the average airline ticket price fell 5.6 percent compared to the same period in 2019.


In the hotel industry, among the five most expensed hotel chains (Marriott, Hampton Inn, Courtyard by Marriott, Holiday Inn Express and Hilton Garden Inn), average spending increased 2 percent over the same period last year.


Among the five most expensed car rental providers (National Car Rental, Enterprise Rent-a-Car, Hertz Car Rental, Budget Car Rental and Avis Car Rental) spending grew 6.4 percent over the same period in 2019.


Ride-hailing services

The two major ride-sharing giants continued to cut in on taxis’ razor thin market share. Uber stayed the category leader by far, with a 71.9 percent market share, compared to 24 percent for Lyft and only 4.1 percent for taxis.


Over the past four years, Uber’s market share has remained steady among business travelers, with most of Lyft’s gains coming at the expense of taxis. In the first half of 2016, Uber had a 72.4 percent market share, with taxis at 23 percent and Lyft at only 4.6 percent.



In other signs of a significant move away from business travel to working from home, vendors such as Amazon and Walmart experienced a big uptick in their share of business expenses. Amazon's share of receipts more than doubled over the same period in 2019. Meanwhile, Walmart’s share of receipts grew 30 percent, as employees equipped their home offices for remote work. The share of receipts for “Supplies” increased over 75 percent since last year.


“The impact of COVID-19 on business travel and the broader economy has been well documented,” said Emburse CEO Eric Friedrichsen in a statement Tuesday. “Employees are still submitting a large number of expenses, but with far more of an emphasis on work-from-home purchases, such as office supplies and internet upgrades.”


He sees more of a trend toward organizations providing benefits such as paid lunches for their employees, and permitting team members to expense equipment such as external monitors and office chairs, helping boost employee morale, well-being and productivity.




5 Social Security myths debunked

Focus on the facts before you claim this valuable retirement income benefit.


Key takeaways

  • Some people believe you have to start claiming Social Security benefits at age 62. That's a myth: 62 is the earliest age you can claim your benefit, but it’s not the only age to do so.
  • Waiting to claim Social Security after age 62 comes with a bonus: roughly 8% additional monthly income per year for each year you delay claiming (up to age 70).
  • If you're divorced and meet certain conditions, you're entitled either to your own Social Security benefit or to 50% of your ex’s Social Security benefit, whichever is higher.


Understanding how Social Security benefits work can be a challenge: There are a lot of rules, the formulas can seem complex, and making decisions with incomplete or incorrect information could end up costing you. That's why it's important to work with financial professionals to develop a Social Security claiming strategy for your overall retirement income plan.


Before you make decisions about claiming this valuable benefit, let's clear up 5 of the most common myths about Social Security that could undermine your ability to generate the income you’ll need in retirement to live the life you want.


Myth #1: You must claim your Social Security benefit at age 62

Some people think you have to start claiming your Social Security benefits at age 62. That's a myth: 62 is the earliest age you can claim your benefit, but it's not the only age to do so.


Your base benefit is calculated according to your "full retirement age," or FRA, and your FRA is determined by your date of birth. The Social Security Administration (SSA) calculates your base Social Security benefit based on your average indexed monthly earnings during the 35 years in which you earned the most (only the years that you paid Social Security taxes).


Tip: You'll find your FRA at Social Security's website, SSA.govOpens in a new window, or on a paper statement mailed to you by the SSA. If you were born between 1943 and 1954, your FRA is 66. People born later have an FRA of 66 (plus some months) or an FRA of age 67.


If you claim Social Security benefits any time before your FRA, you lock in a permanent reduction in monthly income. Claiming at 62 translates to a reduced monthly income of 25% to 30%, relative to your FRA monthly benefit. That means you may receive a lot less monthly retirement income, every year, for potentially several decades. You might think you're not going to live a long life, but many people do: For people age 65 today, 25% of men will live until 93; 25% of women will live to 95.1 A key consideration for when you claim Social Security benefits is maximizing your income for a retirement that could last longer than 30 years.


Wait until age 70 and lock in a "bonus":

  • Waiting to claim Social Security after age 62 comes with a bonus: roughly 8% additional monthly income per year for each year you delay claiming (up to age 70).
  • If your FRA is 66, your monthly income would increase 32% by waiting.
  • If your FRA is 66 years and 6 months (if you turned 62 in 2019), your monthly income would increase 28% by waiting.
  • If your FRA is 67, your monthly income would increase 24% by waiting.


Read Viewpoints on Longevity and retirement


Myth #2: You'll never get back all the money you put into the program

Although 70% of the respondents from our survey2 thought they might not get back all the money they put in, many will. Everyone’s situation is different, but if you live a long time, you may collect more than you contributed to the system.


Due to the complexity of claiming strategies and number of variables involved, the SSA no longer offers a break-even calculator on its website. Social Security is designed to provide a safety net of income for the retired, the disabled, and survivors of deceased insured workers. The contributions you and your employers make during your working years provide:

  1. Current retirees and other Social Security recipients with payments
  2. A guaranteed lifetime income benefit when you reach retirement


While the government does not have a specific account set aside just for you with your FICA contributions (the taxes for Social Security and Medicare paid by you and your employer), one of the most powerful features of Social Security is that it provides an inflation-protected guaranteed income stream in retirement, ensuring against the risk you'll outlive your savings. Even if you live to 100 or more, you'll continue to receive income every month. And, if you predecease your spouse, your spouse also receives survivor benefits until their death.


Myth #3: My ex-spouse's actions could negatively impact my Social Security benefit

If you have an ex-spouse, you may be entitled to spousal benefits. If you were married for 10 consecutive years and have not remarried, and you've reached your FRA, you're entitled either to your own benefit or to 50% of your ex's Social Security benefit, whichever is higher.


If you wish to claim on your ex-spouse's benefit, make an appointment with your local SSA office and bring documents that prove the marriage and divorce. They will calculate your benefit options, and when you submit your claim, you’ll receive the higher benefit.


Tip: There's no need to discuss this with your ex-spouse, and your claim does not reduce or affect your ex's benefit in any way, and vice versa. It's your benefit, even if you've been divorced for many years. And, it may be larger than your own individual benefit.


Read Viewpoints on Unraveling Social Security rules for ex-spouses


Myth #4: Your benefits are based only on wages you've earned before age 65

How your Social Security benefit is calculated can seem mysterious. However, it’s important to know a few essential facts to aid your claiming strategy. You can use the tools on SSA.govOpens in a new window to do the calculations.

  • Your benefit is calculated based on your highest 35 years of earnings; they don't have to be consecutive years or before age 65.
  • If you work past age 65, those earning years will be included, so long as they are high enough to be part of your highest 35 years.
  • Even working part-time after turning 65 may be part of your highest 35 years of earnings.
  • To be eligible for Social Security, you must have a minimum of 10 years of covered employment (that is, employment periods during which Social Security contributions were made), which equates to 40 credits in the Social Security system.
  • If you don’t have 35 years with earnings, zeros will be included in the calculation.


Read Viewpoints on Social Security tips for working retirees


Myth #5: You can claim early, then get a "bump up" once you reach full retirement age

Many believe there is a "bump up" or "added income" once they reach their FRA. They've heard they can claim early at 62, then when they reach 66 or older, their checks will increase to the amount that corresponds to their FRA benefit. That's a big misperception.


There's no bumping up of income once you've claimed your Social Security retirement benefit. However, anyone receiving a benefit can voluntarily "suspend" that benefit after they reach FRA and resume it as late as age 70. If they do, the annual benefit will increase by 8% per year of delay up until age 70. After that, you get an annual cost of living adjustment, but no increase in your base benefit, which will start automatically the month you reach age 70 unless you specify otherwise.


In general, you can cancel your Social Security claim if you do so within the first 12 months of receiving benefits.2 You must repay the full amount you've received, and the full amount a current spouse or family member received based on your benefit. Then, you're eligible to claim again at a later date and will receive a larger monthly payment. Each individual can only cancel a claim once in their lifetime.

There is, however, one case where you could get a "top up" benefit at FRA, but you still need to wait until your FRA to claim your Social Security benefit. In this hypothetical example, Sally earned less during her career than her husband Brad. Her FRA benefit is $700 per month; his is $2,000. As a spouse, she's entitled to 50% of Brad's benefit if she claims at her FRA. She would receive a "top up" of $300 to bring her benefit up to the $1,000 (half of Brad's benefit) to which she is entitled. Social Security will calculate her options and pay out the higher benefit to which she's entitled.


Checklist for your Social Security claiming strategy


Start planning early


Claiming Social Security is an important part of your retirement income plan, but it takes some time to understand the options—and the implications to your savings. Social Security can form the bedrock of your retirement income plan. That's because your benefits are inflation-protected and will last for the rest of your life. Consider working with your Fidelity financial advisor to explore options on how and when to claim your benefits.




How—and when—to spend your college savings

The accounts you use to write tuition checks may have consequences for financial aid.


Key takeaways

  • A variety of savings accounts for education are available to parents, grandparents, and others.
  • The amount of money you have in various types of accounts may affect your student's eligibility for financial aid.
  • Withdrawing money from these accounts in a certain order may increase the amount of financial aid your student can receive.


If you have more than one account for college savings, managing the order in which you withdraw money from your accounts to pay tuition may help improve your family's eligibility for financial aid. Managing financial aid eligibility can play an important role in financing a college education.


Your EFC—and why it matters


With tuition costs continuing to rise, even families who have saved diligently for years expect their savings to cover only a portion of their child's expected college expenses and they look to financial aid to help with the rest. Financial aid generally includes subsidized government loans with relatively attractive interest rates that don't require repayment while the student is in school. Colleges may also offer grants, scholarships, or tuition discounts to qualified students. Unlike loans, these don't need to be repaid after graduation.


Colleges determine the amount of financial aid you qualify for using a calculation known as the expected family contribution, or EFC. Your EFC is determined by your family's income, assets, and the number of members.


The lower your EFC, the greater your eligibility for financial aid.


The order in which you spend your assets depends on your personal financial situation and your financial advisor can help you determine the best course for you and your student. All else being equal, though, the order in which you tap various types of accounts to pay tuition and other school expenses matters because it can raise or lower your EFC and your eligibility for financial aid. "For example, a withdrawal from a 529 owned by a grandparent during the first 2 years of college could be considered income of the child, which could really impact your financial aid," says Melissa Ridolfi, Fidelity vice president, Retirement and College Leadership. That's because the value of assets and income belonging to students have a far greater impact than parents' assets or income when financial aid eligibility is calculated. For example, 20% of a student's assets are considered when determining an EFC but only 5.64% of parents' assets.


With this in mind, you might want to consider this order when tapping your college savings accounts.


1. First, consider spending the money in your UTMA/UGMA brokerage account, if you have one. These accounts let parents (and others) make an irrevocable gift to a minor that can be used for college or any other purpose. Assets in the account belong to the student and earnings on them are generally subject to the minor's tax rate, which is usually lower than the parents' rate. You may want to spend the money in an UGMA/UTMA account first because it has the greatest impact of any type of account in raising your EFC. These accounts are also subject to tax each year, so paying tuition from these accounts before others can lower your tax bill and raise your eligibility for financial aid.


2. A Coverdell ESA is another type of education savings account that could also be tapped to pay tuition at this point. If you have a Coverdell ESA and a 529, you may want to deplete the funds in the Coverdell before tapping the 529. That's because, unlike 529s, money in Coverdell accounts cannot be withdrawn tax-free to make payments on student loans. That distinction aside, Coverdells are taxed much like 529s and have similar implications for EFCs. However, the annual contribution limit is only $2,000 per student and higher income households may not be eligible.


3. Next, you might want to turn to any 529 savings accounts belonging to the student's parents. 529s are flexible, tax-advantaged education savings accounts funded with after-tax dollars. You may contribute as much as 5 years' worth of contributions or $75,000 at one time. When you withdraw money to pay for higher education expenses such as tuition, fees, and room and board, it is not subject to federal income tax.


4. While you can spend from a parent-owned 529 at any time during college without negative consequences, a grandparent-owned 529 may be best saved until the final 2 years. Withdrawals from these accounts may be counted as income for the student and using them earlier in school could significantly raise your EFC and lower your financial aid eligibility.


5. Finally, after these other accounts are spent down, tuition can also be paid from taxable brokerage, savings, or checking accounts owned by parents.


Retirement savings accounts are not well suited to paying for tuition and other educational expenses. Strategies used to grow assets in these accounts often include time horizons and asset allocations that leave them poorly suited to funding education. Also, while there are loans available to cover shortfalls in education savings, there are no similar alternatives for those whose retirement savings run out because they spent down their retirement savings to pay tuition.


Putting it into practice


To see how following these suggestions could make a difference, consider a hypothetical household with an annual income of $75,000. Their college savings include $10,000 in an UGMA, $25,000 in the parents' 529, and $15,000 in the grandparents' 529. They need to withdraw $12,500 a year for 4 years of tuition. If they tap their accounts in the order listed, their EFC would decline from $10,881 in their student's first year of college to $7,644 by their senior year. If instead, they opted to spend the grandparents 529 first and saved the UGMA until the last year, their EFC would instead spike upward to $12,638 in year 3 and decline only to $9,931 by the fourth year of college.


The principle holds true for families with higher incomes and more assets as well. A hypothetical household with an annual income of $250,000, $10,000 in an UGMA, $105,000 in the parents' 529, and $25,000 in a grandparents' 529 and a need to withdraw $35,000 a year for 4 years would see its EFC drop from $74,270 in year 1 to $65,792 by year 4 if they spent the UGMA first and saved the grandparents' 529 for the last 2 years. If they instead drew down the grandparents' 529 first and saved the UGMA until the final year, their EFC would instead rise to $79,470 in year 3 and only fall to $67,913 the year after that.


Improving your family's odds of landing financial aid is an important part of paying for college. But remember, nearly 40% of financial aid packages include loans that must be repaid and the College Board estimates that the average debt burden for recent college graduates averages between $24,000 and $30,000.


To help your student avoid college debt, make sure you understand how much it may cost and think about contributing to a dedicated college savings account. Even if they're entering college next year, you'll still have 5 years to save for tuition.




Tax pros’ top grumbles about the IRS coronavirus slowdown

By Jeff Stimpson


People are going to have a lot of memories of the pandemic — but even as the Internal Revenue Service emerges from its COVID-19-imposed slowdown, tax preparers and taxpayers will likely list “frustration” as one of the biggest.


“Payments aren’t getting applied timely and properly," said Paul Gevertzman, a CPA and partner at Top 100 Firm Anchin in New York. "Erroneous notices are getting issued. They still need to be reviewed even if we think at first glance that it is most likely erroneous, and that is time-consuming.”


Troubles seemed to come in many areas, as tax professionals shared their biggest gripes with IRS performance.


Please wait

“Patience is crucial when working with the IRS during normal operations,” said Timothy Schuster, a senior manager in the private business services group of Top 100 Firm EisnerAmper in Iselin, New Jersey. “Clients dealing with tax matters that require specific action on the part of the IRS have seen a slowdown in both case resolution and taxpayer account review. We’re still working through longer-than-normal wait times when contacting the IRS.”


A failure to communicate

“What I’ve found infuriatingly inconvenient has been the inconsistent communications originating from the White House, the U.S. Treasury and the IRS,” said Enrolled Agent John Dundon, president of Taxpayer Advocacy Services in Englewood, Colorado. “What my clients have found inconvenient has been the complete lack of verbal communication from the IRS and ultimately not knowing whether submitted correspondence has received any attention whatsoever.”

“A major hurdle was finding someone to talk to after our clients received collection notices threatening liens or levies,” said Michael Raiken, a CPA and senior tax manager in the Cranbury, New Jersey, office of Top 100 Firm Prager Metis. “Although the IRS self-imposed the [enforcement] freeze, clients were concerned that their accounts would be the exception. To the IRS credit, it did try to make sure that this didn’t happen and, after many attempts, we were successful in working with someone live at the IRS.”


No ‘fun’ in ‘refunds’

“Refunds aren’t getting processed as quickly as we’d like — especially important when the need to maintain cash flow is so great,” said Anchin’s Gevertzman.

“I have a client waiting for a $200,000 refund due to amended returns,” added Lori Roberts, a CPA and director of state and local taxation for Top 100 Firm PBMares in Fairfax, Virginia. “He can really use that money to keep his businesses afloat.”


Paper trials

Disruption to IRS processing for paper-filed returns was “the most significant challenge we and our clients continue to face, by far and away,” said Nate Smith, a CPA and director in the National Tax Office of Top 100 Firm CBIZ MHM, in Clearwater, Florida. Some IRS solutions — especially a stop-gap solution to fax quick-refund net operating loss carryback claims, which are traditionally paper-filed — deserve praise, but he added, “There are many other returns — particularly claims for refund — that must be paper-filed and aren’t eligible for the temporary fax procedure.”


Write stuff

Correspondence with the IRS turned into a one-way street. “Most of my clients are complaining about any letter responses or paper-filed returns sent to IRS not being looked at and no knowledge if they were even received,” said Brian Stoner, a CPA in Burbank, California.

“The IRS said it has over 10 million pieces of unprocessed mail,” CBIZ’s Smith added, “so we think it could take four to six months or longer to process the amended return. And if there is a question with the amended return when it does get processed, it’s all the more challenging to get the question resolved.”



Yet a “flurry of notices” to taxpayers also caused annoyance, according to Kimberly Dula, a CPA and partner at Top 100 Firm Friedman LLP in Philadelphia. “Many taxpayers filed their returns electronically at various times before the July 15 deadline [but] if the return happened to report a balance due and that balance was paid with a check, many of these checks have not yet been deposited by the IRS. As a result, the IRS system is showing that there is an outstanding tax liability and a notice is being issued.”

“We have clients that choose to pay their tax liability with a paper check,” said Gail Rosen, a CPA in Martinsville, New Jersey. Then the IRS stopped timely processing of paper payments and mailing of balance-due notices. “Couple this with less IRS personnel available to follow up on questions and issues, and you end up with another frustrating situation caused by the pandemic,” Rosen said.


Making amends

“The IRS indicated that they can’t process quick-refund claims until the amended return is processed, so how are these paper-filed returns supposed to be submitted?” CBIZ’s Smith said. “If they’re mailed separately, we’ll want to be sure the IRS knows about both filings so the cart isn’t placed before the horse. If they’re mailed in the same envelope, we may want to consider a backup duplicate filing of the quick refund claim in the event there’s a problem with the addition of that form in the same envelope as the amended return.”

Also concerning is the amended 2018 return situation. “Sometimes the amended 2018 return creates an NOL that’s then eligible for carryback. The temporary fax procedure isn’t available in this situation either, so both the amended return and the quick refund claim must be paper-filed,” he said.


Not all bad news ...

Time was on the side of some, though. “With our clients in tax controversy work, delays are often a welcome sight,” said Raiken of Prager Metis. “Our clients usually need more time to respond to IRS requests or time to gather funds to pay outstanding liabilities through installment agreements and offers in compromise.”




Work-from-home tools to master: Zoom for video conferencing

By Kyle Walters


Note: Products and services mentioned in this article are for illustrative purposes only. They should not imply an endorsement.


When books are written about this unprecedented time in our nation’s history, two of the lasting images will likely be facemasks and Zoom screens. Zoom is so ubiquitous, it has become to video conferencing what Kleenex is to facial tissue. Even though everyone is using Zoom, it’s amazing how few people have actually spent time learning how to use it effectively. There’s no excuse for that.


Zoom offers tons of instructional videos on top of what you can easily find on YouTube and elsewhere. I urge you to share them with your clients so they’re up to speed on Zoom as well. You don’t want to waste the first 15 minutes of a conference helping your client figure out which buttons to push — or worse, fumbling around the interface yourself.


You’re supposed to be the teacher and mentor here. You don’t want to look foolish.


So why don’t we just use conference calls? Video offers a deeper level of engagement when you’re eye to eye with someone, instead of being on the phone with them. Another reason video is so helpful is because the human brain has a really hard time distinguishing between seeing you in person and seeing you on a screen. Either way it seems very real. Don’t believe me? What happens when you’re immersed in a feature length movie? By the end of the film, you feel like you know the actors personally since you’ve gotten to know them so well. That’s the power of visual.


Consider video conferencing instead of phone calls for three reasons:

  1. It enables trust (i.e., Can I see you?)
  2. It fosters engagement (i.e., Are we both paying attention?)
  3. It facilitates alignment (i.e., Are we on the same page/scree?)


Let’s take them one at a time:


1. Trust

People feel like they know you and trust you more when they can see your face. Why does my wife consider the local TV weatherman one of her best friends? Because at 10:15 every night, he’s on camera. Building trust is important when you can’t meet with people face to face. I know it’s not easy, but you need to lean into this new normal as much as you can. If your competitors are not leaning in, fine. That just puts you in an even better position to be a leader and a trusted advisor.


2. Engagement

Another reason video is so compelling for client meetings is that you can’t hide what you’re doing on a video conference call. Everyone has to make eye contact and show that they’re paying attention. You can’t be cutting checks or surfing vacation rentals when you’re on a Zoom call with clients — and vice versa. Also, it’s much easier to show supporting documents on your screen than it is trying to share those docs as email attachments on the call. Unlike phone calls, texts and emails, a screen builds trust.


3. Alignment

Like Zoom, Facetime, and Webex, etc. are all part of the macro-trend toward visual communication in this work-from-home age. And, if video is the way we’re going to be communicating from now on, we have to make sure we’re all on the same page or screen. For instance, if we’re just on the phone and you hear me say the word “tiger,” you will probably envision a fierce, striped animal growling at the zoo. But I have young daughters. I could also be referring to the animated tiger in the Calvin and Hobbes comics. However, if I actually draw a tiger on my Zoom screen, we will both be on the same page (i.e., screen) and know exactly which type of tiger I’m talking about.


I am not endorsing a particular tool. You can pick what works best for you based on the criteria most important to you. Here were the four key criteria for our firm:


  1. No downloads.
  2. No long-term contracts.
  3. Stability. The video shouldn’t cut out no matter how many people are on the call.

4. The ability to have a whiteboard function. Just click a button and draw. That’s really useful for your clients.


Tools like Zoom and Loom (see my previous article) are inexpensive, easy to learn, and have no software to install. Mastering tools like Zoom and Loom are all part of dressing for success when working from home and maintaining the highest level of professionalism in the remote-work world in which we live.


What’s been your experience with teleworking? I’d love to hear from you.




That 2026 sundown date for estate and gift tax exemptions? Don’t count on it

By Alyse Reiser Comiter.


For financial advisors, trying to see around corners of potential tax legislation is crucial in helping clients craft effective estate plans. How much more crucial is such a skill in these extraordinary times?


Changes could be brewing when it comes to estate and gift tax exemption amounts — changes that could mean a significant reduction in how much wealthy clients and their families can transfer to rising generations without taking a significant tax hit.


Don't be complacent about the current 2026 sunset date of the GST tax exemption amounts, writes contributor Alyse Reiser Comiter.


The federal estate, gift and generation-skipping transfer tax exemption amounts are currently set at $11.58 million per individual or $23.16 million for married couples. That means that federal tax is not owed on the transfer of assets below those thresholds.


As they now stand, those exemption amounts are currently set to increase annually through 2025. On Jan. 1, 2026 the exemptions are set to revert to $5.6 million, indexed for inflation from 2018.


However, the coronavirus and resulting economic crisis has triggered trillions of dollars of government stimulus spending that will have to be paid for eventually, even as the severe economic contraction has resulted in federal and state budgets being slashed. Some economists are predicting that taxes will have to increase to help pay for massive stimulus measures and the shoring-up government coffers.


Here’s the bottom line: Financial advisors shouldn’t be complacent about the current 2026 sunset date of the GST tax exemption amounts. In my opinion, current estate and gift tax exemption amounts may very well be on the chopping block — and well before 2026.


Depending on the factors I’ve mentioned above and the results of the election this November, significantly lower estate and gift tax exemption amounts could be enacted even as soon as next year.


Economy + election = ?

Granted, this is only speculation at this point. But advisors with wealthy clients should explore utilizing exemptions now, as this could become a “use-it-or-lose-it” scenario sooner than expected.


Although some clients may want to wait until after the November elections to make a decision, we recommend working with clients now to think through their options and even get documents ready so clients have the option to execute their wishes efficiently post-election.


Start the discussion by working with your client by exploring how and how much to give in the event that the GST tax exemption expires earlier than the current sundown date of 2026.



Election 2020: Trump vs. Biden on tax policy

Alyse Reiser Comiter


Gifts can be made outright or to a trust for the benefit of descendants or a spouse. If a family already has irrevocable trusts in place it may be possible to use those trusts to reduce the time and expense involved in making a transfer.


As stated above, the estate and gift tax exemption could become a “use-it-or-lose-it” scenario sooner than otherwise anticipated. If the exemption amounts are reduced, any gifts made in the past will count against the new lower exemption amount.


Therefore, if a married couple can afford to use both spouses’ remaining gift tax exemption — a total of $23.16 million less any exemption allocated to previous transfers — they should.


If the couple can’t, or is not comfortable, using both exemptions, it is more tax efficient to have one spouse use the exemption in full, with the other giving what they can rather than making gifts in equal amounts.


Because splitting gifts is a fairly common way to give, we also recommend reviewing 2019 gifts, if that return hasn’t been filed yet, as part of this analysis.


Which assets to give

All things being equal, it is best to gift assets with the greatest likelihood of appreciation, as all future appreciation escapes estate tax.


However, it is important to consider which assets are funding a family’s current lifestyle. Identify those assets that won’t be missed and back into the appropriate assets to give from there.


It is important to keep in mind that even if a trust is structured so that a spouse is a beneficiary, the funds in the trust should be the last assets used, as the goal is to deplete the taxable estate before looking to protected assets. Consider first contributing assets to a family limited partnership, and then gifting a minority interest to obtain discounts on the transfer.




A Breakdown of Donald Trump's Tax Plans

Spencer Wilson, EA


As we are moving closer to the 2020 presidential election, we now know who our candidates will be when it comes time to vote.


With just a few months left, we continue to work to gain a better understanding of the fiscal, legislative, and other policies each candidate has proposed and how those will impact us should a particular candidate win in November.


Today, we will review incumbent candidate President Donald Trump’s tax policy. Please note that our intention is to provide an unbiased analysis of Trump’s policy proposals and does not indicate an endorsement for (or any opinion on) either candidate.



In December 2017, the Trump administration passed the Tax Cuts and Jobs Act, which included legislation impacting U.S. individual taxpayers and businesses.


Adjusted Individual Tax Brackets

Individual tax brackets were lowered by between 2.6 and 4%.  In addition, the income ranges were adjusted, effectively lowering the individual taxpayer marginal tax rates. The highest tax bracket was reduced from 39.6% for those making over $426,700 ($480,050 for married taxpayers filing a joint return) to 37% for those making over $500,000 ($600,000 for married couples filing a joint return).


Standard Deduction

The standard deduction for taxpayers nearly doubled under the Tax Cuts and Jobs Act. In 2019, the standard deduction was $12,200 for single filers and married individuals filing separately, $18,350 for head of household, and $24,400 for married taxpayers filing a joint return.


Personal Exemption and Child Tax Credit

The Tax Jobs Act increased the value of the child tax credit for taxpayers from $1,000 to $2,000 while also increasing the AGI for phasing out the credit from $110,000 to $400,000.  The refundable portion of the child tax credit was increased to a maximum of $1,400 for each child. In addition, the act introduced a $500 tax credit for other dependents.


The tax legislation also eliminated the personal exemption for taxpayers as a deduction from income.


Itemized Deductions

The Tax Cuts and Jobs Act introduced significant changes to itemized deductions.


The state, local, sales, and property tax deduction has been limited to $10,000 on an annual basis.

For those who take the medical expense deduction, the AGI limitation was reduced from 10% of adjusted gross income to 7.5%.


Prior to the passing of the Tax cuts and jobs Act, the mortgage debt limit for taking the mortgage interest deduction was $1,000,000. The passed legislation reduced this limit to $750,000.


In addition, the ability to deduct interest related to home equity loans has been reduced with the exception of indebtedness used to build, buy, or substantially improve the home securing the loan.


Charitable Contributions

For those who can take the charitable deduction for cash contributions, the total allowable deduction has increased from 50% to 60% of adjusted gross income.



The Tax Cuts and Jobs Act also included numerous provisions impacting businesses and corporations.


Qualified Business Income Deduction

Legislation introduced the Section 199A deduction which allows a reduction of income for certain types of business income from pass-through entities of up to 20%.


Limits on Business Interest and the Meals and Entertainment Deduction

The 2017 legislation eliminated the deduction for business meals and entertainment expenses, with the exception of meals where the taxpayer or employee are present, and the meals are not considered to be extravagant.  These can continue to be deducted at the 50% rate.


The business interest deduction for businesses with less than $25 million in gross receipts has been reduced from a maximum of 50% of adjusted taxable income to 30% of adjusted taxable income.


Other legislation impacting a business’ lobbying expenses, excess business loss, and net operating losses were also included.


The business provisions of the Tax Cuts and Jobs act also included legislation covering depreciation, fringe benefits for employees, opportunity zone initiatives, and updates to certain business structures and accounting methods.


One of the notable depreciation provisions outlined in the legislation allows companies to expense 100% of the value of business property which is acquired and placed into service between September 28, 2017 and December 31, 2022. Once the 100% expensing period has expired, taxpayers will be able to continue to expense business property acquisitions at a rate reduced by 20% per year, until the provision expires on December 31, 2026.


In addition, the income threshold for Section 179 depreciable business assets was increased from $1 million to $2.5 million.



The Trump administration has proposed wanting to consider an extension of the Tax Cuts and Jobs Act past 2025 when the tax provisions are expected to expire.


According to White House representatives, the president is considering legislation surrounding middle class income tax cuts and changes to the capital gains tax rate in an effort to spur the economy.


The Trump administration has also looked at the potential to pass legislation that would permanently eliminate the payroll tax for taxpayers.


The Trump administration has noted that it plans to present Tax Cuts 2.0 prior to the election which will help to provide additional insights into Trump’s proposed tax legislation.


With the election just a few months away, it will be important to understand what the tax plans are for each candidate and how that might impact you or your business.


If you’d like to learn more about the tax proposals coming from Joe Biden’s campaign, you can read about them here.




What Are the Tax Plans of the Major Parties' Presidential Candidates?

Lee Reams, BSME, EA


As the November elections approach, you might want to know what the two front-running presidential candidates' tax plans for the future are. The following is an overview of their positions, at least what is known now. However, the political and economic landscapes can change, and there is no assurance these plans won't be revised or that they will have eventual Congressional backing. However, the information may be helpful as you look toward future tax planning.


These are just proposals of what changes might happen based on the election results. It takes acts of Congress to move plans into law. With various scenarios in play, it might be wise to look at proactive tax planning to minimize future tax liability. Find a 5-star tax professional to meet your needs at






AICPA joins in urging tax deductions for expenses paid with forgiven PPP loans

By Michael Cohn


The American Institute of CPAs joined with more than 170 business and trade organizations in asking congressional leaders to allow businesses to write off expenses paid for with Paycheck Protection Program loans that have been forgiven.


The letter, addressed Tuesday to House Speaker Nancy Pelosi, D-California, and Senate Majority Leader Mitch McConnell, R-Kentucky, urged Congress to make a technical correction to fix the tax treatment of loan forgiveness on PPP loans. Separately, on Tuesday, the U.S. Small Business Administration released a set of questions and answers on PPP loan forgiveness.


The letter from the AICPA and other business groups, including the National Retail Federation, the International Franchise Association, the American Dental Association, and Associated Builders & Contractors, asks Congress to reverse an IRS notice that denies borrowers the ability to deduct the same expenses that qualified them for loan forgiveness. However, the groups argue that goes against the intention of the CARES Act.


“When the PPP was adopted as part of the Coronavirus Aid, Relief, and Economic Security Act, Congress made clear that any loan forgiveness under the program would be excluded from the borrower’s taxable income,” they wrote. “Specifically, a recipient of a PPP loan was eligible for forgiveness of indebtedness for amounts equal to certain payroll, mortgage interest, rent, and utility payments made during a prescribed period, with any resulting cancelled indebtedness excluded from the borrower’s taxable income.”


The groups contend that the IRS notice got the intent of the legislation wrong and argue against the interpretation of Treasury Secretary Steven Mnuchin, who has rejected previous appeals on the matter.


“The publication of IRS Notice 2020-32 effectively overturned this policy by denying these borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness,” said the letter. “The Notice argues ‘… Section 265(a)(1) of the Code disallows any otherwise allowable deduction … for the amount of any payment of an eligible section 1106 expense to the extent of the resulting covered loan forgiveness…’ Defenders of the IRS’ position argue that allowing businesses to deduct these expenses would result in business owners receiving a 'double' benefit. This is simply untrue. Congress intended for the loan forgiveness under PPP to be tax-free. The IRS Notice reverses that position and eliminates any benefit, let alone a double benefit. If a business has $100,000 of PPP loans forgiven and excluded from its income, but then is required to add back $100,000 of denied business expenses, the result is the same as if the loan forgiveness was fully taxable. Section 1106(i) becomes moot if the IRS Notice is allowed to stand. On the other hand, denying the correct tax treatment of these loans will result in hardship for many struggling businesses.”


The groups pointed out that more than 5 million businesses have participated in the PPP and over $520 billion has been lent to businesses through the program.


“In nearly all cases, these businesses have already spent the loan proceeds keeping employees on payroll and meeting other necessary costs,” said the letter. “In addition to the approximate $100 billion tax hike the IRS position represents, denying businesses the ability to deduct these expenses could result in numerous other complications — how would the denial of deductible wages affect the 199A deduction or the Work Opportunity Tax Credit? How do you offset expenses incurred in 2020 with loan forgiveness realized in 2021? Does disallowed interest expense avoid the excess business interest expense limitation under section 163(j)? The correctness of the IRS’s reasoning underpinning Notice 2020-32 is a debatable point and if left intact it will certainly result in extensive legal challenges. What is not debatable, however, is congressional intent regarding the tax treatment of these forgiven loan amounts.”


As part of the next round of COVID-19 relief legislation, the groups are asking Congress to clarify the matter by restoring the tax benefits as intended under the CARES Act to help distressed businesses.


“Millions of businesses across the country received much-needed relief during a time of global crisis and it’s imperative that they receive the full measure of assistance intended by Congress,” said AICPA vice president of taxation Edward Karl in a statement. “Many small businesses are still in economic distress and we urge members of Congress to take action to ensure that the necessary corrections are included in the next relief package.”


A group of senators introduced bipartisan legislation known as the Small Business Expense Protection Act of 2020 to deal with the problem.


SBA PPP loan forgiveness FAQ

Separately, the 10-page FAQ document released Tuesday by the SBA provides some much-needed information for small businesses seeking forgiveness on their PPP loans, although it is a mixed bag.


“Corporate shareholder-employees will find some good news in the FAQs, but those who were looking to attempt to pre-pay retirement or health benefits will not be happy with the guidance in the FAQs,” said Ed Zollars of Kaplan Financial Education in a blog post.


There are three notable clarifications in the FAQ, according to Aprio, a Top 100 Firm, in an email to clients Wednesday. They involve accelerated payments of health care coverage and retirement plan contributions; payments made under agreements executed prior to Feb. 15, 2020; and the definition of transportation costs that are eligible for loan forgiveness. Unfortunately, like the SBA’s previous guidance for mortgage interest, the FAQ document says forgiveness is not provided for expenses for group health benefits or retirement benefits accelerated from periods outside the covered period or the alternative payroll covered period.


For payments under lease or mortgage agreements to be eligible for loan forgiveness, they need to be related to an agreement before Feb. 15, 2020. However, the FAQ expands that guidance to clarify that if a lease existed before Feb. 15 and expires on or after that date and is renewed, the lease payments made under the renewed lease during the covered period are eligible for forgiveness. Similarly, if a mortgage loan on real or personal property that existed before Feb. 15 is refinanced on or after that date, the interest payments on the refinanced mortgage loan are eligible for forgiveness.


The FAQ also clarifies exactly what qualifies as transportation costs: “Guidance relating to transportation has been vague until now,” said Aprio. “The FAQ clarifies that eligible expenses for loan forgiveness related to a service for the distribution of transportation refers to transportation utility fees assessed by state and local governments.”





SBA offers guidance on appealing rejections of PPP loan forgiveness

By Michael Cohn


The U.S. Small Business Administration has posted rules about how businesses who have been turned down for forgiveness of their Paycheck Protection Program loans can appeal the decision, and about how forgivable PPP loans interact with the SBA’s Economic Injury Disaster Loans.


The interim final rule from the SBA and the Treasury Department describes the appeal procedures for PPP loan forgiveness applications that have been turned down. The PPP was included as part of the CARES Act in March and provided hundreds of billions of dollars in forgivable loans for small businesses trying to cope with the economic fallout from the novel coronavirus crisis. Businesses could have the loans forgiven if they met certain conditions, such as keeping their employees on payroll for up to eight weeks. Otherwise, their applications for loan forgiveness could be rejected by the SBA.


Many accountants have been busy in recent months helping their small business clients navigate the ever-changing and confusing rules about applying for PPP loans to keep their businesses running, and now applying to have the loans forgiven. However, business clients may need to turn to their lawyers if they need help with dealing with the SBA’s Office of Hearings and Appeals, which has been charged with PPP loan forgiveness denials.


“Note that the process is a formal legal process, with representation of the borrower limited to attorneys,” noted Ed Zollars, a partner in the CPA firm of Thomas, Zollars & Lynch, in a blog post Wednesday for Kaplan Financial Education about the new rules. “The special status granted to CPAs to practice before the IRS does not carry over to practice before the Small Business Administration. This information is being provided not to suggest CPAs who are not licensed attorneys should be representing clients in such matters, nor providing detailed advice in the background as the client tries to handle the appeal on his/her own. Rather, a basic knowledge of these issues will help the CPA advise the client regarding actions the client would need to take if the client wishes to challenge the SBA’s decisions, and that advice will most often be to look toward obtaining legal counsel if the borrower wishes to consider moving forward with a formal appeal.”


The SBA noted that the interim final rule takes effect immediately, although it’s still accepting comments on it. But the SBA is dispensing with the usual period of waiting for comments to come in before the rule goes into effect in order to expedite the appeals process. Businesses that appeal the loan forgiveness denial will need to have a copy of the loan review decision that’s being appealed, a statement about why the decision was erroneous, the relief that’s being sought, and signed copies of payroll tax filings filed with the IRS and the state. They will also need to have various federal tax returns and schedules, such as Form 1040 with Schedules C or F, and individual employee wage reporting and unemployment insurance tax filings actually reported to the relevant state, for the relevant periods of time, if they’re not provided with the PPP Loan Forgiveness Application, or an explanation of why they’re not relevant or available.


The SBA also wants the name, address, phone number, email address and signature of the appellant or attorney. The maximum length of the appeal petition should be 20 pages, not including any attachments.


Guidance on PPP and EIDL interaction

Separately on Tuesday, the SBA also provided guidance on the interaction of PPP loan forgiveness with advances on the Economic Injury Disaster Loans. The EIDL was a separate $374 billion program for businesses offered by the SBA to provide emergency loans to small businesses through the SBA to deal with the pandemic. Unlike the $670 billion PPP, the loans aren’t forgivable. However, like the PPP, many businesses had trouble applying for them and getting the money. In some cases, businesses were told they had been approved, but didn’t receive the money.

Unlike the PPP loans, the EIDL loans are provided directly by the SBA rather than private lenders, leading to a backlog that provoked consternation during a congressional hearing last month. In some cases, businesses applied for loans under both programs and received them. The guidance from the SBA, in the form of answers to frequently asked questions, or FAQs, deals with matters such as what happens when the SBA has to reduce the PPP loan forgiveness amount by the amount of the EIDL advance. The SBA said that if a borrower received an EIDL advance, the SBA is required to reduce the borrower’s loan forgiveness amount by the amount of the EIDL advance. The SBA will deduct the amount of the EIDL advance from the forgiveness amount remitted by the SBA to the lender who provided the PPP loan.


As for the question of how a lender should handle any remaining balance due on a PPP loan after the SBA remits the forgiveness amount to the lender, the answer is if a PPP loan isn’t forgiven in full (including if there has been a reduction in the forgiveness amount for an EIDL advance), any remaining balance due on the PPP as of Aug. 11, 2020 needs to be repaid by the borrower.


“The lender is responsible for notifying the borrower of the loan forgiveness amount remitted by SBA and the date on which the borrower’s first loan payment is due,” said the SBA. “The lender must continue to service the loan. The borrower must repay the remaining loan balance by the maturity date of the PPP loan (either two or five years). If a borrower is determined to have been ineligible for a PPP loan for any reason, SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.”




Questions Remain After IRS Rolls Out Guidance On Payroll Tax Deferral

Kelly Phillips Erb Senior Contributor


On August 8, 2020, President Trump issued a directive to the Department of Treasury to allow for the deferral of payroll taxes for the period of September 1, 2020, through December 31, 2020. Details were scarce, but a few days later, Treasury Secretary Steven Mnuchin suggested to Fox Business' Maria Bartiromo that the deferral would be voluntary


Today, the Department of Treasury and Internal Revenue Service (IRS) finally issued official guidance for taxpayers. For many, it raised more questions than answers.

First, a little context and background. 


The President’s Order called for a deferral of the employee's share of Social Security taxes for the time period beginning September 1, 2020, through December 31, 2020, for certain workers. Specifically, the deferral is restricted to "any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount concerning other pay periods." That generally works out to a restriction on those making more than $100,000 annually.


To be clear, no deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period. It's not deferral "up to" that amount with no relief for the overages. Rather, the deferral only applies to workers under the income threshold.


You can read the entire Order here.


For those qualifying workers, the deferral applies to the employee's portion of Social Security taxes. You may think of your payroll taxes as one lump sum, but the non-income tax bits are actually two separate taxes. Together, Social Security and Medicare taxes are known as FICA (Federal Insurance Contributions Act) taxes and are taken right out of your paycheck. If you're employed, you pay Social Security tax (6.2%) and Medicare tax (1.45%) as the employee, subject to certain limits. The deferral would apply to the Social Security portion of employee wages only.


Employers are also subject to payroll taxes. But under the CARES Act, employers can already elect to defer the deposit and payment of the employer's portion of Social Security taxes. The deferral applies to deposits and payments of the employer's share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020, with half being due on December 31, 2021, and the remainder due on December 31, 2022. The CARES Act-related relief also applies to self-employed persons (keep that in mind towards the end).


The IRS has now released Notice 2020-65 (downloads as a PDF), which is ostensibly intended to shed some light on how the deferral will work. In this tax professional's opinion, it does not.


Let's start with what is clear.


The Notice begins: On August 8, 2020, the President of the United States issued a Presidential Memorandum directing the Secretary of the Treasury (Secretary) to use his authority pursuant to section 7508A of the Internal Revenue Code (Code) to defer the withholding, deposit, and payment of certain payroll tax obligations.


You can find the legalese bits in section 7508A here. But basically, that section of the Code allows the President to postpone the collection of the tax during a national disaster. On March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic (Emergency Declaration). In other words, everywhere in the United States currently qualifies as a disaster.


But it's important to understand that section 7508A only allows the President to defer collecting the tax. It does not allow for forgiveness. That's critical because while folks (including me) assumed that the "payroll tax cuts" initially touted were really cuts - like those we've seen before - these are not the same. However, these do not have a blessing from Congress, and there is no reduction or cut: it's just a deferral.


That context is so important because of the next part of the Notice. The Notice makes it clear that this is the obligation of "employers that are required to withhold and pay the employee share of social security tax under section 3102(a) or the railroad retirement tax equivalent under section 3202(a)."


Further, "[t]he deposit obligation for employee social security tax does not arise until the tax is withheld." That's a fancy way of saying that so long as the employer isn't withholding any tax on behalf of the employees, the employer doesn't have to make a deposit to the feds (payroll taxes are typically deposited on a particular schedule) during the deferral period. The employer doesn't have to start making deposits until the deferral is no longer in place. Specifically, the Notice postpones those deposits "until the period beginning on January 1, 2021, and ending on April 30, 2021."


So far, most of this is expected. The tax is postponed for a certain period, and then it must be repaid. That's deferral in a nutshell.


So what's the thing that caught many by surprise? It's this: The Notice defines Affected Taxpayers not as employees, but as employers. Here's why that matters.


The Notice states that "An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes."


That's the repayment obligation. And what it says is that the employer must recover those taxes from employees over a few months - or interest, penalties, and additions to tax will become due. Ouch, right?


And what if the employee balks at repayment? According to the Notice, that doesn't matter. It makes clear that "Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee."


But what if the employee leaves the company? What if the employee doesn't make enough money to ratably pay back the tax? The Notice doesn't address what happens in those circumstances, but it would appear that the obligation to make those payments remains with the employer.


(NB: After I posted this, there was a lively discussion on Twitter with some tax professionals disagreeing with this interpretation, but the fact that there is not clarity or consensus on this issue is telling.)


It's also not evident how this will be reported for tax purposes. I assume we’re going to see a revamped version of Form 941 (that’s a payroll tax form). But is it opt-in? Opt-out? Tellingly, the Notice did not reference Treasury Secretary Mnuchin's "optional" language. 


And if you’re scratching your head because you feel like something else is missing, you’re right: the Notice does not address Social Security tax for self-employed persons. I had noted on Twitter - after the Order was released - that section 3101(a) was tied to employment-related taxes only, and not self-employment taxes (that’s typically found at section 1401). I assumed, as did many tax professionals, that we’d find out that was simply an oversight. That appears not to be the case: the portion of self-employment tax not covered by the CARES Act is not eligible for deferral under the Order.


There are so many unanswered questions. With just days to go before the deferral period begins - that’s Tuesday - I don't see how this will actually roll out on time. If employers were looking for clear direction from Treasury and the IRS, this is not it.





IRS says companies are responsible for deferred payroll taxes

By Laura DavisonAllyson Versprille


The Internal Revenue Service said companies will be responsible for collecting and paying back any deferred payroll taxes under a directive by President Donald Trump aimed at helping workers while the administration and Democrats are stalemated on a stimulus deal.


The agency issued guidance Friday that implements Trump’s order to delay the due date for payroll taxes for millions of workers from Sept. 1 through year-end. Come next year, the taxes will need to be paid by April 30, however — unless Congress votes to forgive the liabilities, the release showed.


If lawmakers don’t step up, the guidance says employers must withhold the taxes from employees from Jan. 1 through April 30, meaning that workers will have double the deduction taken from their paychecks next year to pay back the deferred portion.


Employers “may make arrangements to otherwise collect the total applicable taxes from the employee,” if necessary, the release said.


The guidance puts the responsibility on employers for ultimately paying back the levies, and that could cause many to decline putting the extra money in workers’ paychecks — blunting any potential economic or political boost Trump had hoped to reap.


Executive limits

The complications showcase the limits to unilateral action by the executive branch. Processing challenges have hobbled a separate move by Trump to extend, for a time, half of the $600 a week supplemental insurance benefits that expired in July.


Among the issues with Friday’s guidance: what employers should do if employees quit before the end of the year, said Adam Markowitz, an enrolled agent and vice president at Howard L Markowitz PA CPA.


The guidance “gives me zero reason to tell my employers that they are protected for this,” he said.


Treasury Secretary Steven Mnuchin has said he “can’t force” companies to stop withholding the payroll levies, but that he hopes many companies will participate. The U.S. Chamber of Commerce has said many won’t implement the deferral, because of difficulties administering it and the greater burden for employees next year.

“The chamber remains concerned that it leaves some critical questions unanswered,” Caroline Harris, the group’s chief tax policy counsel, said in a statement. “As a result, uncertainties persist that make implementation a continuing challenge.”


Companies could potentially recoup the remaining taxes owed by withholding them all from employees’ final paycheck, said Adam B. Cohen, a partner at the law firm Eversheds Sutherland, but the guidance doesn’t explicitly say if that’s permitted.


The guidance also contains problems for employees if their employers choose to participate: They’ll have smaller paychecks next year when they have payroll taxes taken out of their paychecks twice.


Employees would see lower-than usual income from January to April, said Kyle Pomerleau, a resident fellow at the American Enterprise Institute, adding: “Individuals may not be ready or expecting a drop.”


There’s little time to decide whether to go ahead and reprogram payroll systems to accommodate the changes, with Sept. 1 looming fast.


To get the deferral, workers must earn less than $4,000 every two weeks, which amounts to about $104,000 per year. An individual earning $50,000 will owe about $1,073 in deferred taxes next year. Someone earning $104,000 — the maximum income to which the deferral applies — will owe $2,232.




Election 2020: What it could mean for investors

Find out what 5 Fidelity experts are watching as election season gets into swing.


Key takeaways

  • Expect short-term stock market volatility as the election heats up. But longer term, economic fundamentals are likely more important drivers for stocks than who wins the White House.
  • A Biden presidency could mean more economic stimulus than a Trump second term, but also higher taxes on businesses, higher income people, and capital gains.
  • While President Trump has focused on deregulation, a Biden administration would likely re-regulate certain industries. Among the possible targets: Fossil fuels, financial services, health care, and big tech.
  • Stock buybacks have been a significant source of returns for stock investors over the past decade. Democrats could move to limit them, while Republicans would likely support the status quo.


Elections matter to all of us, as citizens and as investors. US presidential election results drive policies that help shape our economy, the markets, and our lives. So it’s important to think about what the outcome could mean to your wallet.


And it's not just the presidential election that matters. Since much of a president's agenda requires congressional approval, the outcome of the congressional races is also key. Indeed, this time around, control of the Senate may be the key to enacting the next president's agenda.


The political outlook


At this early stage in the 2020 campaign, there is plenty of time for surprises to alter the course of history—particularly given the fact that this election is taking place in the midst of a global pandemic that has hit America hard. Still, it's worth considering a range of possible election outcomes. Here we look at 3 of the most likely scenarios—and the potential financial implications of each.

  1. President Trump wins a second term and Congress remains split between a Democratic House and a Republican Senate
  2. The Democrats sweep the White House and Congress
  3. Former Vice President Joe Biden wins the presidency, but the Republicans hold the Senate


Scenario 1 is a continuation of the status quo. Scenario 2 likely brings re-regulation of some industries, higher taxes on corporations, upper-income individuals, and investors and more fiscal stimulus than in Scenario 1. In scenario 3, changes to tax and spending policy are likely muted by a GOP Senate.


Let's dig into some details.


The economy


No matter who is elected next year, the economy will likely still be recovering from recession and hardly at full throttle. So fiscal policy—federal taxes and spending—is likely to be key to economic growth.


"The 2020 multi-trillion-dollar fiscal spending package has been a major factor that's kept this economic environment from getting worse, along with the Fed's monetary stimulus," says Dirk Hofschire, Fidelity senior vice president of asset allocation. "But there is a risk, as we go forward, if the economy is not gaining significant traction and you still have large parts of the economy operating at limited capacity, that we're still going to need a lot of fiscal support."


Biden has proposed a combination of more federal spending and a redistribution of the tax burden from middle income taxpayers to corporations, high-income taxpayers, and investors. Hofschire says that's likely to mean more short-term fiscal stimulus under a Democratic presidency than a Republican one, particularly in a Democratic sweep.


"The tone of the Democratic fiscal plan would also be more likely to try to address growing income inequality and provide more spending and/or tax breaks geared to lower- and middle-income households," says Hofschire. "Because lower-income households tend to spend most of their income gains, this might be helpful consumer stimulus if the economic recovery is still struggling to regain traction."


But Hofschire speculates that a Biden tax plan, all other things being equal, would probably be "somewhat worse for the corporate profit outlook" than a Trump second term, and could fuel inflation longer term.


During the Trump administration, federal tax rates on corporate and individual income and capital gains came down dramatically. The president has spoken of further cuts in a second term, but with a Democratic House that could be difficult to achieve. A more likely scenario is a continuation of current tax rates.


By contrast, Biden has proposed increasing the top tax rate for corporations to 28% from 21%, and for individuals to 39.6% from 37% while treating capital gains and dividends, now taxed at a top rate of 20%, as ordinary income.


Increases in corporate tax rates would be a hit to earnings, which are one driver of stock prices (though not the only one). But historically, rising corporate and individual tax rates have not meant falling stock prices, Fidelity sector strategist and market historian Denise Chisholm notes. In the 13 previous instances of tax increases since 1950, the S&P 500, the stock index that tracks most of the major companies in the US, has shown higher average returns, and higher odds of an advance, in times when taxes are increasing, according to Chisholm's research.*


This holds true even when you drill down into key sectors of the S&P 500. "Economically sensitive sectors, like consumer discretionary, oddly have done better on average during years taxes increase. These counterintuitive odds suggest something else is going on—the market either discounts it in advance or the economy has received stimulus to offset it," says Chisholm.


For more on taxes and stocks, read Viewpoints on Presidential elections and stock returns

Of course, if you are facing rising individual rates, you will want to consider strategies to minimize the impact on your bottom line. In addition to higher federal tax rates on income and investment gains, Fidelity's head of government relations and public policy Jim Febeo notes that the Biden campaign has talked about rethinking retirement savings tax incentives to promote more equality among different income levels. That could include reduction in the tax deduction for IRAs and 401(k)s, at least for upper-income people.


"With the fiscal situation where it is, all sources of potential revenue could be on the table," says Febeo.

It's always a good idea to take advantage of tax-preferred retirement savings opportunities, but that may be particularly true this year, given the potential focus on tax increases under a Democratic regime. Other strategies to consider if you are concerned about tax rates rising: taking some capital gains, or converting a portion of your traditional 401(k) or IRA savings to a Roth.


Read Viewpoints on Roth IRA conversion: 7 things to know




For the overall stock market, there are pluses and minuses under all 3 election scenarios. With Biden, you'd likely have more fiscal stimulus but higher taxes on corporations and higher earners. That could include higher taxes on capital gains and disincentives for share buybacks, which have helped drive stock valuations higher in the US than other countries. With Trump, you'd likely see lower taxes but less stimulus and a more confrontational approach to US-China relations, which has unsettled markets in the past.


That makes it difficult to say which administration would be better for stocks. Says Jurrien Timmer, Fidelity's director of global macro: "It's my personal sense that the 2020 election will have less impact on the markets than some suggest. Ultimately, it's the long wave of economic fundamentals that drives the markets beyond any one election or any one party."


Still, in the near term, there would likely be different winners and losers under a Republican versus a Democratic regime, due to very different regulatory approaches.


The Trump administration ushered in a period of deregulation. One major winner was the oil and gas industry, which benefited from less stringent environmental regulations. "The Biden administration would likely go in the exact opposite direction, rolling many of those executive orders back and pushing for more clean energy," says Hofschire.


Other sectors that could come under heightened scrutiny in a Democratic administration include health care, financial services, and big tech. Says Timmer: "The 5 FANG stocks (Facebook, Amazon, Apple, Netflix, and Google) are 20% of the US stock market and are actually pulling the market higher right now. If they stop pulling, the market may stop going up, so that's yet another dimension to the puzzle."




On the trade front, the differences between the candidates may be more stylistic than substantive. "The tactics and tone of the US-China relationship might change," says Hofschire.


"Trump often takes a confrontational tone on social media. Biden is probably a much more conventional politician in regard to trade and foreign policy and would be more likely to build multilateral coalitions to try to influence China. However, there is a broad, bipartisan consensus to get tough on China, so any future policies are likely to continue to ramp up export controls, restrictions on investment, and other decoupling activities that deepen deglobalization pressures," Hofschire says. Among them: Incentives to bring back key links in the industrial supply chain to the US or at least diversify out of China.


Interest rates


Regardless of the election, interest rates are likely to stay low for a long time—so it's a good time for borrowers. Says Beau Coash, institutional portfolio manager in the fixed income division: "Given that the Fed is going to keep buying and supporting the bond market, it's hard to see interest rates going up anytime soon—probably not before we get back to a fully open economy."


If you are considering buying a home or refinancing, now is a great time to comparison shop. If you have a large portion of your portfolio in cash or low-yielding bonds, it might be a good time to meet with an advisor to discuss a long-term investment strategy with a combination of stocks for growth potential and high-quality bonds for wealth preservation.


Read Viewpoints on Should I refinance my mortgage? and 9 ways to achieve your long-term plan


Health care


Trump is opposed to the Affordable Care Act, the health care system put in place under the Obama administration. The Trump administration has brought a lawsuit against it all the way to the Supreme Court. Meanwhile, Biden has talked about enhancing the Affordable Care Act. So far, however, the details of their future plans are faint. So, we will need to wait and see how those plans take shape.


Biden has also spoken about extending Medicare eligibility to unemployed people 60 and over. If enacted, this may offer an interesting opportunity for people considering early retirement—or forced into it. Since health care costs are often a key reason people can't afford to retire early, Medicare could help solve that problem, and potentially enable people to postpone Social Security to their full retirement age or later, capturing higher monthly benefits.


What's ahead?


Given the pandemic, passions surrounding this election, and uncertainty about how and when the election results may be resolved, it would not be surprising if markets got volatile.


"There's a reasonable probability that we won't know the outcome of the election for at least a few days and maybe a few weeks after the election," says Hofschire. "The pandemic is creating huge logistical challenges for the electoral process, making in-person voting more difficult and causing delays in counting due to the high volume of mail-in ballots. Unfortunately, the highly polarized partisan atmosphere isn't making this situation any better. The futures markets are pricing in rising stock-market volatility moving into the elections, and I expect a messy or prolonged aftermath could extend that volatility into December and maybe even January."

The cause of present uncertainty may be unique. But we've been through other bouts before. For investors, the key is always the same: Stay focused on what you can control—your personal goals and time horizon, and make sure you have a plan in place to get you there—no matter what life, elections, and markets may throw at you. If you need help shaping or refreshing your plans, a Fidelity advisor can help.


Trump vs. Biden: Potential policy impacts





No major changes

Decrease in taxes on low and middle earners, increase in taxes on corporations, high-income individuals, possibly with changes to capital gains

Federal spending

No major changes

Increase with focus on supporting the recovery

Stock buybacks

No major changes

Possible limits


Possible antitrust focus

New antitrust focus on big tech


Focus on deregulation

Focus on re-regulation


Confrontational tone and continued focus on tariffs

More traditional, multinational approach to pushing back on China


No major changes likely

The tax deduction for retirement contributions could be on the table for upper-income people




People should have tax withheld from unemployment now to avoid a tax-time surprise


Due to the Coronavirus pandemic, millions of Americans received or are currently receiving unemployment compensation, many of them for the first time. It’s important for these individuals to know that unemployment compensation is taxable.


People can have taxes withheld from this compensation now to help avoid owing taxes on this income when they file their income tax return next year.


By law, these benefits are taxable and must be reported on a federal income tax return for the tax year it was received. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security Act.


Withholding is voluntary

Federal law allows recipients to choose a flat 10% withholding from these benefits to cover part or all their tax liability. To do this, recipients should complete Form W-4V, Voluntary Withholding Request, and give it to the agency paying their benefits. Don't send the form to the IRS. If the paying agency has its own withholding request form, use it instead.


Recipients who don't choose voluntary withholding, or if the withholding isn’t enough, can make quarterly estimated tax payments. The payment for the first two quarters of 2020 was due on July 15. Third quarter is due September 15, 2020 and fourth quarter on January 15, 2021. Taxpayers can visit to view all payment options.


Here are other types of payments taxpayers should check for withholding:

  • Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
  • Railroad unemployment compensation benefits
  • Disability benefits paid as a substitute for unemployment compensation
  • Trade readjustment allowances under the Trade Act of 1974
  • Unemployment assistance under the Disaster Relief and Emergency Assistance Act of 1974
  • Unemployment assistance under the Airline Deregulation Act of 1978 Program


Recipients who return to work before the end of the year can use the IRS Tax Withholding Estimator to make sure the right amount of tax is taken out of their pay. This online tool is available only on, and it can help workers or pension recipients avoid or lessen year-end tax bills or can estimate a refund.


Reporting unemployment compensation

In January 2021, unemployment benefit recipients should receive a Form 1099-G, Certain Government Payments, from the agency paying their benefits. This form will show the amount of unemployment compensation received during 2020 and any federal income tax withheld. Taxpayers should report this information, along with other income, on their 2020 federal tax return.




A tax checklist for newly married couples

Marriage changes a lot of things and taxes are on that list. Newlyweds should know how saying “I do” can affect their tax situation.

Here’s a checklist of items for newly married couples to review:

  • Name and address changes

- Name. When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on a person’s tax return must match what is on file at the SSA. If it doesn’t, it could delay any tax refund. To update information, taxpayers should file Form SS-5, Application for a Social Security Card. It is available on, by calling 800-772-1213 or at a local SSA office.
- Address. If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, people should send the IRS Form 8822, Change of Address. Taxpayers should also notify the postal service to forward their mail by going online at or their local post office.

  • Withholding
    - After getting married, couples should consider changing their withholding. Newly married couples must give their employers a new Form W-4, Employee's Withholding Allowance within 10 days. If both spouses work, they may move into a higher tax bracket or be affected by the Additional Medicare Tax. They can use the IRS Withholding Estimator on to help complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax for more information.
  • Filing status
    - Married people can choose to file their federal income taxes jointly or separately each year. While filing jointly is usually more beneficial, it’s best to figure the tax both ways to find out which works best. Remember, if a couple is married as of Dec. 31, the law says they’re married for the whole year for tax purposes.
  • Scams
    - All taxpayers should be aware of and avoid tax scams. The IRS will never initiate contact using email, phone calls, social media or text messages. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on to find out.




Six tips for people starting a new business

Understanding the tax responsibilities that come with starting a business venture can save taxpayers money and help set them up for success. has the resources and answers to help people through the process of starting a new business.


Here are six tips for new business owners.

  • Choose a business structure. The form of business determines which income tax return a business taxpayer needs to file. The most common business structures are:
    • Sole proprietorship: An unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business.
    • Partnership: An unincorporated business with ownership shared between two or more people.
    • Corporation: Also known as a C corporation. It’s a separate entity owned by shareholders.
    • S Corporation: A corporation that elects to pass corporate income, losses, deductions and credits through to the shareholders.
    • Limited Liability Company: A business structure allowed by state statute. 
  • Choose a tax year. A tax year is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:
    • Calendar year: 12 consecutive months beginning January 1 and ending December 31.
    • Fiscal year: 12 consecutive months ending on the last day of any month except December. 
  • Apply for an employer identification number. An EIN is also called a federal tax identification number. It’s used to identify a business. Most businesses need one of these numbers. It’s important for a business with an EIN to keep the business mailing address, location and responsible party up to date. IRS regulations require EIN holders to report changes in the responsible party within 60 days. They do this by completing Form 8822-B, Change of Address or Responsible Party and mailing it to the address on the form.
  • Have all employees complete these forms:
    • Form I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services
    • Form W-4, Employee’s Withholding Allowance Certificate
  • Pay business taxes. The form of business determines what taxes must be paid and how to pay them.
  • Visit state’s website. Prospective business owners should visit their state's website for info about state requirements.




History lessons from past tax hikes

Higher rates may not tank the stock market the way many investors expect.



Key takeaways

  • Tax increases may not be the obstacle that many investors expect.
  • Typically, there is sizable federal spending as an offset.
  • The stock market has the potential to see past the tax increases because of so many other economic factors.

Nobody can tell you for sure what is going to happen to taxes in the US after the 2020 election, but we can look at how the stock market has reacted to past significant changes to the tax code, going back to 1950. Despite the assumption many have that increasing tax rates would sink stocks, markets have produced better than average returns in the wake of changes because of other economic factors happening at the same time to influence subsequent market behavior.


"There is never 'one thing' for the market,” says Fidelity sector strategist Denise Chisholm. "There are too many moving parts to hold all else equal."


A look back

Taxes break down into 3 basic baskets: corporate, personal, and capital gains. Big increases are rare, only happening about 10% of the time over 70 years, amounting to just 23 instances among the 3 types. The last time all 3 kinds of taxes increased at the same time was 1993, followed by an increase in personal taxes and capital gains taxes in 2013.


Rates have been cut since then, through the Tax Cuts and Jobs Act, which went into effect in 2018. The top corporate tax rate is now 21%, the top personal rate is 37%, and the top long-term capital gains rate is 20%.


The rates will sunset in 2026 and return to what they were previously if Congress does not make changes sooner: top rates of 35% for corporate taxes, 39.6% for personal taxes, and still 20% for long-term capital gains. The 2020 election will be a key indicator, depending on who wins the presidency and which parties control Congress.


"We would expect a Democratic tax plan to revisit the Tax Cuts and Jobs Act, and that could mean a higher corporate tax rate and increased marginal rates for higher income earners, as well as higher investment tax rates for capital gains and dividends," says Jim Febeo, senior vice president, head of federal government relations at Fidelity.


What does history say? In the 13 previous instances of tax increases since 1950, the S&P 500, the stock index that tracks most of the major companies in the US, has shown higher average returns, and higher odds of an advance, in times when taxes are increasing, according to Chisholm's research, which analyzed the data in the calendar year of the tax changes, plus the year prior and year after. This holds true even when you drill down into key sectors of the S&P 500.


"Economically sensitive sectors, like consumer discretionary, oddly have done better during years taxes increase. These counterintuitive odds suggest something else is going on—the market either discounts it in advance or the economy has received stimulus to offset it," says Chisholm.

The research shows that bonds have also followed this counterintuitive trend. You might expect bonds to benefit from the obstacle of a tax increase, because investors become more defensive or the economy softens in response to the tax increases. But, in fact, they tend to struggle. While historically, high-yield bonds tend to do better, investment-grade, government, and municipal bonds have struggled in relative performance. While correlation isn't necessarily causation, inflation did have a higher tendency to accelerate during years that taxes rose, potentially the result of fiscal stimulus at the same time.

A timeline of the tax rate increases in personal, corporate and capital gains taxes from 1950 to 2013, with the corresponding annual price return for the S&P 500.

Source: Haver/FMR


What else factors in?

Changes to the US tax code don't happen in a vacuum. There's usually a lot of other action going on in Congress and the economy in general, because there is an economic need driving all the actions. There's typically significant stimulus spending by the government, either in defense, infrastructure, or social welfare, as well as action from the Federal Reserve to curb inflation by raising rates.


"The stimulus is perhaps the critical factor that may be the reason for the higher than average returns—that is something investors really need to keep their eye on," says Chisholm.

What this might mean for today


Past performance is no guarantee of future results, of course. Our current economic situation, compounded by COVID-19, is different than any situation we've faced since the 1950s.


"There are all sorts of things you can throw into the analysis about how different it's going to be this time and I get that, but it's very interesting to look at the fact that 100% of the time corporate taxes were raised equities advanced the year prior and the year during," says Chisholm.


So beware of knee-jerk assumptions that tax increases necessarily mean down markets for stocks. For investors, it's important to have a plan you trust and can stick with, no matter what happens in the short term with stock markets. You can talk to a professional to find a suitable approach for your own investing needs.




39 states lack the money to pay bills for COVID-19

By Michael Cohn


At least 39 states did not have enough money to pay all of their bills at the end of 2019, leaving them ill-prepared to shoulder the costs of the novel coronavirus pandemic, according to a new report.


The report, from Truth in Accounting, a think tank that analyzes government financial reporting, found the majority of states aren’t financially ready for any crisis, especially one as serious as the one they are currently facing from the COVID-19 pandemic. The group’s 11th annual "Financial State of the States" report analyzed the states' audited Comprehensive Annual Financial Reports for fiscal year 2019, which is the latest available data. It found that total debt among the 50 states amounted to $1.4 trillion at the end of the fiscal year 2019, which will only worsen as states cope with the unpredictable impacts of the pandemic.


However, 11 states had some money put aside at the start of the pandemic. But even the healthiest states are projected to lose billions of dollars in revenue as a result of the coronavirus pandemic. The 50 states together are projected to lose a combined $397 billion in revenue, according to estimates from Truth in Accounting. The uncertainty surrounding the pandemic makes it difficult to determine how much will be needed to maintain government services and benefits, but overall debt levels for many states are expected to increase.

The new report comes as the federal government is considering additional aid for the states, although Republicans and Democrats in Congress remain at odds over providing additional aid to states and cities, even in an election year.


These governments that were being reckless with their budgets were saying, ‘Oh, we’re balancing our budgets,’ and we were saying no, they’re not balancing their budgets, and nobody paid attention,” said Truth in Accounting CEO Sheila Weinberg. “Well, now that they’re in trouble they’re going to all the taxpayers of the United States wanting money. Everybody does need to pay attention to what’s going on. All these state and local governments are coming to the federal government and wanting a bailout.”


She especially blamed states like New Jersey and Illinois for their budgeting gimmicks, which landed them at the bottom of the list. On the other hand, she credited Alaska and North Dakota, which are at the top of the list, having set aside money in their budgets, although both states have been deeply affected by the plunge in oil prices this year.

The full 50 state ranking is below:

Alaska | Taxpayer Surplus: $77,400

North Dakota | Taxpayer Surplus: $37,700

Wyoming | Taxpayer Surplus: $19,600

Utah | Taxpayer Surplus: $5,500

Tennessee | Taxpayer Surplus: $3,400

South Dakota | Taxpayer Surplus: $3,300

Nebraska | Taxpayer Surplus: $2,800

Idaho | Taxpayer Surplus: $2,800

Oregon | Taxpayer Surplus: $2,600

Iowa | Taxpayer Surplus: $1,500

Minnesota | Taxpayer Surplus: $100

Oklahoma | Taxpayer Burden: -$700

Virginia | Taxpayer Burden: -$800

Indiana | Taxpayer Burden: -$1,300

North Carolina | Taxpayer Burden: -$1,400

Florida | Taxpayer Burden: -$1,600

Arkansas | Taxpayer Burden: -$1,700

Arizona | Taxpayer Burden: -$1,700

Montana | Taxpayer Burden: -$2,000

Colorado | Taxpayer Burden: -$2,600

Nevada | Taxpayer Burden: -$2,600

Georgia | Taxpayer Burden: -$2,900

Wisconsin | Taxpayer Burden: -$3,100

New Hampshire | Taxpayer Burden: -$3,900

Missouri | Taxpayer Burden: -$4,300

Ohio | Taxpayer Burden: -$5,800

Washington | Taxpayer Burden: -$6,100

Kansas | Taxpayer Burden: -$6,200

West Virginia | Taxpayer Burden: -$6,300

Maine | Taxpayer Burden: -$6,700

New Mexico | Taxpayer Burden: -$7,500

Alabama | Taxpayer Burden: -$7,600

Mississippi | Taxpayer Burden: -$10,400

Texas | Taxpayer Burden: -$11,300

South Carolina | Taxpayer Burden: -$13,400

Rhode Island | Taxpayer Burden: -$14,700

Maryland | Taxpayer Burden: -$15,200

Pennsylvania | Taxpayer Burden: -$16,400

Michigan | Taxpayer Burden: -$17,000

Louisiana | Taxpayer Burden: -$17,100

New York | Taxpayer Burden: -$17,200

Vermont | Taxpayer Burden: -$18,900

California* | Taxpayer Burden: -$21,100

Kentucky | Taxpayer Burden: -$24,700

Delaware | Taxpayer Burden: -$24,900

Massachusetts | Taxpayer Burden: -$30,100

Hawaii | Taxpayer Burden: -$31,700

Connecticut | Taxpayer Burden: -$50,700

Illinois | Taxpayer Burden: -$52,000

New Jersey | Taxpayer Burden: -$57,900




IRS says lenders don’t need to report PPP loan forgiveness

By Michael Cohn


The Internal Revenue Service said Tuesday that lenders who make Paycheck Protection Program loans that are later forgiven under the CARES Act should not file information returns or furnish payee statements to report the forgiveness.


In Announcement 2020-12, the IRS said that when all or a portion of the stated principal amount of a covered loan is forgiven because the recipient satisfies the forgiveness requirements under section 1106 of the CARES Act, an entity isn’t required to, “for federal income tax purposes only,” and should not, file a Form 1099-C information return with the IRS or provide a payee statement to the recipient as a result of the forgiveness.


The IRS noted that filing such information returns with the IRS could result in the issuance of underreporter notices on the IRS’s Letter CP2000 to eligible recipients, and furnishing payee statements to those recipients could therefore cause confusion. The IRS issued the announcement with the goal of preventing such confusion.


The announcement may lead to some confusion anyway, however, as the transparency around the PPP loans has been the subject of some wrangling in Congress. Earlier this year, Democrats pressured the Small Business Administration to release more information about the recipients of the loans. Some information eventually came out in the form of spreadsheets, but the data proved to be inaccurate in many cases. Earlier this month, the Justice Department’s Criminal Division charged 57 defendants with PPP-related fraud and has identified nearly 500 people suspected of COVID-related loan fraud.




Treasury: Scammers Using Fake Letters in Collections Scam


Michigan taxpayers with past-due tax debts should be aware of an aggressive scam that’s making the rounds through the U.S. Postal Service, according to the Michigan Department of Treasury (Treasury).


In the scheme, taxpayers receive a letter about an overdue tax bill, asking individuals to immediately contact a toll-free number to resolve an outstanding state tax debt. The letter aggressively threatens to seize a taxpayer’s assets ― including property and Social Security benefits ― if the debt is not settled.


 “This is a tricky scam that has been reported throughout the state,” said Deputy State Treasurer Ann Good, who oversees Treasury’s Financial and Administrative Services programs. “Taxpayers have rights. If you have questions about an outstanding state tax debt, please contact us through a verified number so we can talk about options.”


The piece of correspondence appears credible to the taxpayer because it uses specific personal facts that’s pulled directly from publicly available information. The scammer’s letter attempts to lure the taxpayer into a situation where they could make a payment to a criminal.


The state Treasury Department corresponds with taxpayers through official letters sent through the U.S. Postal Service, providing several options to resolve an outstanding debt and information outlining taxpayer rights.


Taxpayers who receive a letter from a scammer or have questions about their state debts should call Treasury’s Collections Service Center at 517-636-5265. A customer service representative can log the scam, verify outstanding state debts and provide flexible payment options.





Working from home may create home office, nexus issues

By Roger Russell


Many taxpayers who thought, back in March 2020, that the relocation of their workplace from somewhere “downtown” to home was merely a temporary circumstance are continuing to work remotely. For some, this is due to the ongoing pandemic or the need for their workspace to be reconfigured in light of the virus. And while it was a disruption in their work life to begin with, many have decided they prefer to continue their work out of a home office.


Any significant change in one’s life can have tax consequences, and that is also true when shifting to working from home. Taxpayers who are now working from home due to the COVID-19 pandemic may be confronted with a number of issues affecting their taxes. These include what to do with home office expenses, differing nexus rules for state taxation, and the special rule for teachers out-of-pocket expenses on their federal returns, according to Mark Luscombe, CPA, JD, and principal analyst at Wolters Kluwer Tax & Accounting.


The home office deduction

Prior to the Tax Cuts and Jobs Act, unreimbursed employee business expenses were deductible as an itemized deduction on Form 1040, Schedule A, Luscombe indicated. “Since the enactment of the Tax Cuts and Jobs Act, those expenses are no longer deductible,” he said. “However, self-employed persons can still deduct home office expenses on Form 1040, Schedule C and supporting schedules. And taxpayers can seek reimbursement from their employers for home office expenses, and those reimbursements are not taxable to the employee if there is adequate documentation to constitute an accountable reimbursement plan.”


Ten jurisdictions — nine states and the District of Columbia — have statutes requiring employers to reimburse employees for necessary expenses as a result of their job duties, he noted: “But it may be difficult to determine the amount of some of those expenses, and the extent to which they were necessary.”


The jurisdictions that require employers to reimburse their employees for necessary job-related expenses are: the District of Columbia, California, Illinois, Iowa, Massachusetts, Montana, New Hampshire, New York, Pennsylvania and South Dakota.


State nexus issues

“Most states have a rule similar to New York’s, where they tax income earned in the state and the residents of the state. In other words, there is an income tax base nexus for taxation both on where the taxpayer is a resident and on where the income is earned,” Luscombe said. “The general rule is the taxpayer pays tax to the state where they earn the money, and get a credit in the state of residence for having paid tax to the state where it was earned. However, a lot of neighboring states, particularly in the Northeast and Midwest, have entered into reciprocity agreements under which the taxpayer is only taxed in the state of residence. New York, because it feels it wouldn’t be to its benefit, has not signed any reciprocity agreements. Illinois has signed on with surrounding states except for Indiana — many people living in northwest Indiana work in Chicago. Illinois does, however, have a reciprocal agreement with Iowa.”


In response to the coronavirus, at least 14 jurisdictions — the District of Columbia and 13 states — have enacted provisions stating that they will not change their nexus taxation as a result of a taxpayer temporarily working from home due to the COVID-19 pandemic, Luscombe explained. “And there is a proposal in Congress that would require all states on a temporary basis to only tax income in the state of residence,” he said.


Jurisdictions that have passed legislation stating they will not change nexus rules include the District of Columbia, Alabama, Georgia, Indiana, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, North Dakota, Rhode Island, South Carolina and Vermont.


Teacher expenses

The $250 above-the-line deduction for out-of-pocket expenses on the federal income tax return is still available to teachers, Luscombe said. “Although the statutory language states that the equipment and materials must be ‘used by the eligible educator in the classroom,’ most observers believe that this language could apply to a virtual classroom as well as a physical classroom,” he advised.




Leaving your house to your loved ones

A good estate plan can save your family a lot of stress and money.


Key takeaways

  • Deciding what you'd like to do with a home is a decision that is financial, emotional, and logistical.
  • Be sure to discuss your plans with your family to avoid discord and costly mistakes.
  • There are many ways to transfer a house, including by will, revocable trust, transfer on death, and deed, among other options.



For many families, deciding what to do with a home can often be the most complex part of an estate plan: A house is potentially worth a significant amount of money, can be complicated to inherit, and may also be wrapped in memories and emotion. For these reasons, it is particularly important to come up with a specific strategy for the role a home plays in an estate plan.

3 things to know before getting started


1. Input from everyone involved can make planning easier

To prepare for a smooth and efficient transfer of a home, start by thinking about your goals and your financial situation. First ask: What would you like to see happen with the house? After understanding your goals, be sure to discuss your wishes with your family.


Your children may have different ideas about whether they would want to live in, sell, or keep the property for investment purposes. It can be difficult to have these conversations, and you may want to have someone neutral help facilitate the conversation, but it is very important.


For example, consider a couple who was planning to leave a vacation home to their 2 children equally so that the children could continue the long tradition of family vacations. However, one child lived far away and already owned a vacation home in that area. Leaving the home equally would have created issues regarding maintenance cost, property taxes, and upkeep. If the siblings decided not to share the house and executed a transfer of ownership, it might have increased taxes and created transaction costs. Disagreement on whether to continue shared ownership could also have caused hurt feelings and disrupted what was otherwise a good relationship. A family conversation helped them realize that a shared inheritance didn't make sense.


2. Your heirs could end up owing money

If the person who inherits the home doesn't want to keep ownership of it, they may incur legal fees, taxes, and other transaction costs. In addition, several states have estate tax exemption limits far below the federal level. If the value of the home exceeds that limit and there aren't other assets from the estate available to pay the taxes, the heir may face a state estate tax bill and may have insufficient funds to pay it. That could force a sale of the home or force the heir to seek financing options to pay the bill. If they do sell the house, it will be taxed based on the value at the time of the original owner's death.


3. The mortgage might become due

Most mortgages have a "due on sale" clause that may be triggered at death. If so, other liquid assets in the estate would need to be used to pay off the debt, the inheritor would need to qualify for a mortgage on their own, or the home would need to be sold.


6 options for passing down your home

Let's look at a number of different ways to make passing down a home as smooth as possible.


1. Co-ownership

One common idea that people have about passing the home to kids is seemingly simple: Just add the heirs as co-owners on the current deed. If the deed lists someone else as a joint tenant, they will become co-owners at the time the deed is changed, and they will automatically take ownership of the home at the time of the original owner's death.


There are some downsides to this approach, however. First of all, if a child is added as a co-owner, there are gift tax considerations. There is a limit to how much someone can gift another person without paying a gift tax, both yearly and in a lifetime. When a house is given as a gift through co-ownership, the portion transferred is considered a taxable gift and counts toward the lifetime exemption, so it has to be reported for gift tax purposes. Say a single parent adds a child to the deed, the parent would need to report 50% of the value of the home as a taxable gift (based on the fair market value of the home at the time of the transfer).


Secondly, gifts made during a lifetime are subject to carryover cost basis (the value of the house for tax purposes). Thus, the cost basis used for capital gains tax purposes doesn't get a step-up at the time of death—instead, the child may get a larger tax bill on the portion of the house that was given to them if they eventually sell the house after the co-owner's death.


Finally, as co-owners, the home becomes an asset of the child, creating several potential issues. First, if the child runs into financial trouble, gets divorced, or has other issues, your home may be put under a lien or become subject to other action. Second, the co-owner would need the child's permission to sell the home, take out a new mortgage, or refinance an existing one. And finally, the child may decide they would like to sell the home, which can create challenges.


2. A will

A will can be used to pass on a home. This process helps ensure that the owner decides who inherits the property. However, assets that transfer through a will still pass through the probate process, which can be time-consuming and expensive. In addition, a will is a public document, so anyone can review the decedent's assets and see who inherited them, so this can create a privacy concern.


3. A revocable trust

A revocable trust is a legal structure that allows the "grantor" or "trustee" to retain control over their assets during their lifetime, as well as specify exactly how and when their assets pass to their beneficiaries. After the trustee's death, the trust acts as a will substitute and enables the assets to be privately and quickly distributed without going through the time and expense of the probate process. This will allow the trustee full control and use of their home during their lifetime while providing for efficient distribution at their death.


Due to the complexity of trusts and the variation in state-level rules, it is important to work with a professional to set up a trust, which costs money, but may be the only way to help ensure that the trust works effectively. It is also important to remember that it may be necessary to change the titling of your assets for the trust to function as intended.


Finally, a trust may be particularly beneficial for families that own properties in more than one state. Without a trust, an estate may pass through probate in multiple states. "For many of my clients, one of their main goals is to pass down assets to beneficiaries without probate, and so a revocable trust is a core component of their estate plans," says Terri Lyders, Vice President, Advanced Planning at Fidelity.


4. A qualified personal residence trust (QPRT)

A QPRT is a way to move a primary or vacation residence out of your estate at a reduced gift tax cost. With a QPRT, the home is transferred to the trust right away, but it allows the original owner to retain the right to live in the home for the duration of the QPRT term. During that time, they are responsible for rent, maintenance, taxes, and other aspects of ownership. The trust has an end date after which ownership of the house is transferred to the beneficiary (generally children or a trust for their benefit) and the original owner no longer has the right to occupy the house (although a lease may be negotiated with the beneficiary).


In order for this strategy to be effective for tax purposes, the original owner must outlive the term of the trust. Otherwise, if they die before the trust terminates, the value of the home is included as part of their taxable estate and could be pulled back into the estate. While a QPRT may be used for a primary residence, it can be challenging for a person to lose the right to occupy their home, or pay rent to do so, and thus QPRTs may often be used for vacation homes.


Two big benefits of a QPRT include the reduced gift tax cost of the transfer (because the owner retains the right to live in the home for a period of time and keeps some of the value of the house), and that the value of the home is frozen for estate tax purposes at the time the trust is created. This means that for estate tax purposes, the value of the home is established at the time it enters the trust—and future price appreciation won't affect the estate's tax bill. For a family facing estate tax issues, this strategy may help to limit taxes in the event that the property value increases over time.


Tip: A property that is subject to a mortgage can be difficult to handle from a gift tax perspective, and therefore it is often suggested that any debt be paid off prior to the transfer to a QPRT.


5. A beneficiary designation—a transfer on death (TOD) deed

Some states offer a TOD designation on a deed which essentially names a beneficiary for that property. With a TOD designation, assets pass outside probate, so it's quick and private, and the heirs still get a step-up in basis for tax purposes, which means the value of the house is adjusted to current market value. It may also be less expensive than setting up a trust.


There are some drawbacks to a TOD designation. It only allows individuals or charities as beneficiaries, not a trustee under a trust. That means that if a child is still young at the time of the transfer, they would directly own the home, which may not be practical. There is also no contingency, so if the child named as beneficiary dies before the original owner, there is no provision to skip a generation and pass the asset to their children—the TOD deed would have to be updated by the owner. Additionally, if the home is passed to an adult receiving government benefits, it could affect their eligibility.


Tip: TOD deed options are limited by state law, and many states do not offer this option at all. Check with your attorney or tax advisor to determine whether this option is available and would be appropriate for your circumstances.


6. Through selling

If it's unlikely that children will want the home, consider selling it and renting a home later in life. Issues like maintenance, health, and lifestyle may be more important than the financial considerations here, but be sure to consider the tax impact of this decision.


Current federal tax law allows a capital gains exclusion of either $250,000 (for an individual) or $500,000 (for a married couple filing jointly) on the sale of a house, provided that they have lived in that house for 2 of the previous 5 years, and that the home meets the residency requirements. Gains above that amount are taxed. Inheriting a property comes with a step-up in basis (which means it's reassessed at current market value) potentially eliminating capital gains tax.


The bottom line

A home can be the most valuable asset in an estate. If you don't take any action and die without a will or having made any other arrangements, your assets will pass according to your state intestacy laws, which may or may not reflect your wishes. This may include going through probate—a process that is potentially expensive, public, slow, and complicated.


The transfer of real estate assets can pose unique legal, tax, and emotional issues for a family, so it may be beneficial to work with a professional to help protect yourself and your loved ones. It's important to come up with a plan that makes sense for you, and your heirs, and to create an efficient strategy to execute it.




What tax changes matter most to you?

Your tax future is up for grabs again, but not all changes will impact everyone equally.


Key takeaways

  • What tax changes matter most to you depends on your personal situation.
  • The 2020 election could impact many types of taxes: personal, capital gains, and corporate.
  • To prepare for potential changes, you may want to consult with a financial professional to assess your current situation.


Elections come and go, but taxes are forever. During election seasons, politicians promise all sorts of changes to the US tax code, a complex set of federal laws that runs in the thousands of pages and impacts nearly every aspect of our financial lives.


This season, Republicans are talking about further cuts to individual, corporate, and capital gains taxes, which were reduced dramatically in 2018. The President has also spoken of eliminating the payroll tax. Meanwhile, Democrats are advocating shifting the income tax burden from lower- and middle-income families to upper-income taxpayers and corporations, while raising taxes on dividends and capital gains.


But the truth is, those proposed changes are complicated and require a lot of coordination between the President, Congress, the Treasury Department, and the Internal Revenue Service to enact reform. That means small or technical changes happen more frequently than comprehensive reform.


What matters most to you depends on your personal situation.


If you’re still working and don’t have a lot of investments outside of 401(k)s or other qualified retirement accounts, then you may be most directly impacted by changes to federal income taxes. Changes in the payroll tax, also known as FICA, could also make a big difference for you. On the other hand, if you are retired or living off investment income then the rates on capital gains, dividends, and interest are important. And if you own a business structured as a corporation, then you will care what happens with corporate taxes.


As you think about the changes that might be ahead for taxes, no matter which way the pendulum swings, you might want to pay attention to developments in these areas.

Tax brackets


When politicians talk about changing tax brackets, they often focus on the rate at the very top—which is now 37% in 2020 for individuals and heads of households earning over $518,400, and $622,050 for couples filing jointly, after the Tax Cuts & Jobs Act of 2018 brought the top rate down from 39.6%.


"But for the average American, the top rate won't impact them," says Christopher Williams, principal at EY Private Client Services.


For most middle-income people earning $80,000 to $320,000 as individuals or heads of households, what matters is whether changes to the rest of the income levels shift you to a higher or lower bracket and what that does to your effective tax rate, meaning the overall rate you pay on your total income.


Capital gains


The vast majority of Americans do not report any taxable stock transactions in the typical year, and only about 15% report gains from the sale of equities in taxable accounts, according to IRS statisticsOpens in a new window. But the amount adds up for those who do have gains to report on their 1040 forms, to the tune of some $200 billion or more a year.


"The rate of taxation on those large transactions has the potential to matter a great deal to wealthy investors," says Matt Kenigsberg, vice president, investment & tax solutions at Fidelity.

Right now, rates on long-term capital gains are on the lower end of where they have been historically, at 0% for single filers up to $40,000 in income, 15% to $441,450, and 20% over that amount.


"It's unclear how much lower they could go down," says EY's Williams. "If they go up, you may see people want to refocus on tax efficiencies in taxable accounts."


Corporate taxes


Much political talk about taxes revolves around corporate tax rates, but unless you own a C corporation (as opposed to an S corp, LLC, or other entity), changes in rates could have very little direct impact on you. However, you can look at what happens with corporate taxation in the macroeconomic sense, and see the impact down the line on individuals in the US.


Increases in taxes have historically come along with increases in government spending, and that can affect the overall picture for corporations and individuals more than just a conventional-wisdom assumption like if taxes go up, corporations see a 5% hit in earnings.


"Spending more than offsets it, both from an economic and stock market perspective," says Fidelity sector strategist Denise Chisholm.


"And, ultimately, tax bills do need to be revenue-neutral," adds Williams. "If Congress can bring in more revenue from corporate tax dollars, then they need to collect less from individuals."


Baskets of deductions


Your 1040 is almost like a fingerprint—unique to you in all your complexity as a taxpayer. The tax changes that could benefit you the most will depend on your situation.


Almost everything is up for grabs right now. Many of the provisions of the Tax Cuts and Jobs Act will expire after 2025 if they are not extended (or repealed even earlier by additional Congressional action).


For instance, if you own property in a high-tax state like New York, New Jersey, or California, the most dollar impact to you might be if the next round of tax reform restores the full deduction for state and local taxes (SALT) if you itemize your return.


But then again, says Williams, "If the restoration of the SALT deductions comes with the resurrection of the alternative minimum tax, then it might be a wash for most people."

Make a plan


To prepare for potential changes, you may want to consult with a tax advisor to assess your current situation and then decide if you need to change your long-term financial strategy. If you are concerned that tax rates will rise in the future, you may want to consider taking advantage of current rates in a variety of possible ways.

  • Review your tax return to assess how much of your income is subject to taxes. Looking at your taxable income (e.g., adjusted gross income minus deductions) will keep you better informed about potential impacts as new tax legislation occurs.
  • If you have investments in taxable accounts, you may want to assess your long-term investing plans and see if tax-loss harvesting makes sense for you.
  • If you are concerned about increases in your tax bracket as soon as next year, consider accelerating some income into 2020 to pay the tax on it in the current year.
  • If you are considering making a large charitable contribution, evaluate the timing of it in light of how the value of the potential tax deduction would change if future tax rates increase or if limits change on charitable deductions.
  • If you have concerns about your tax bracket increasing in retirement, it might be a good idea to consider shifting some of your tax-deferred savings now into a Roth IRA, which will have tax-free growth potential and will not be subject to required minimum distributions (RMDs), helping to lower your taxable income in the future.
  • If you are concerned about the estate tax exemption changing to a lower amount than the current $11.58 million per individual, look at your estate plan and see if you want to make any changes.




IRS adds marijuana industry page to website

By Michael Cohn


The Internal Revenue Service has added a page to its website aimed at the marijuana industry to inform cannabis business owners about their tax compliance responsibilities.


More states in recent years have been allowing marijuana for medical and in some places recreational use. While 33 states currently allow medical use, 11 states permit recreational use as well, according to CNN. In addition, five states have marijuana legalization on the ballot in the November election.


However, as far as the federal government is concerned, marijuana is still classified as a controlled substance, and banks can face penalties for dealing with cannabis businesses, making it difficult for business owners to pay their taxes and do other transactions, including paying their taxes. The Democratic-controlled House has scheduled a vote for later this month on legislation to legalize marijuana, but even if it’s passed there, it’s unlikely to pass in the Republican-controlled Senate.


The IRS marijuana industry web page notes that many marijuana-industry businesses conduct transactions in cash, which need to be reported, like any other form of payment. It provides information about cash payment options for unbanked taxpayers. Other information is available about estimated payments and the importance of good recordkeeping, along with links to other relevant pages on


“The IRS understands this is a new and growing industry and provided frequently asked questions about record keeping, cash payment options, large cash amounts, and other related topics to help promote voluntary compliance in the industry,” said the IRS. “In addition to this page, the IRS also offers a wealth of general small business guidance and resources on”




IRS updates per diem rates for 2020-2021

By Michael Cohn


The Internal Revenue Service issued the special per diem rates Friday for 2020-2021 that taxpayers can use to substantiate the amount of expenses they can deduct for lodging, meals and incidental expenses when they’re traveling away from home, effective Oct. 1, 2020.


Notice 2020-71 provides the special transportation industry rate, the rate for the incidental-expenses-only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.


The special meal and incidental expenses rates for taxpayers in the transportation industry are $66 for any travel locality within the continental United States and $71 for any travel locale outside the continental U.S. The rate for any locality of travel within or outside the U.S. for the incidental expenses only deduction is $5 per day.


For purposes of the high-low substantiation method, the per diem rates in lieu of the rates in last year’s Notice 2019-55 are $292 for travel to any high-cost locality and $198 for travel to any other locality within the continental U.S. The amount of the $292 high rate and $198 low rate that’s treated as paid for meals for purposes of Section 274(n) is $71 for travel to any high-cost locality and $60 for travel to any other U.S. locality.


The per diem rates in lieu of the rates in Notice 2019-55 for the meal and incidental-expenses-only substantiation method are $71 for travel to any high-cost locale and $60 for travel to any other locale within the continental U.S.


For high-cost localities, the notice provides a table showing which counties have a federal per diem rate of $245 or more, and are high-cost localities for specific parts of the year.




What Do People Think About Taxes? They Are Partisan, Dazed, And Confused

By Howard Gleckman


The newly published results of an extensive survey of public views on taxes find deep partisan divisions and a widespread lack of understanding about federal income and estate taxes. The survey also shows that people’s perceptions of how government spends revenue may have a powerful effect on their views of the tax code. The conclusion: Partisanship defines not only what people think about taxes, but how they think about taxes.


The study, by Harvard University economist Stefanie Stantcheva, was published in August by the National Bureau of Economic Research (paywall). It found fairness and distributional effects of tax policy far outweighed efficiency in the minds of most respondents. While the concept of fairness was critically important to people’s views of taxes, perceptions of what fairness means varied widely—and seemed to correlate with their political affiliation. For another perspective on tax fairness, take a look at this report by my TPC colleague Vanessa Williamson.


Widespread misunderstanding

Stantcheva also found widespread misunderstanding of the tax code, a finding similar to those in other studies. For example, respondents thought median-income households pay twice as much tax as they really do and that top-bracket households pay slightly less than they do.


They believed that the top individual income tax bracket kicks in at $188,000 (in 2019, it really was about $612,000 for joint filers) and that it applies to 20 percent of households (the reality is less than 1 percent). At the same time, on average they thought 36 percent of decedents pay the estate tax (it is less than 0.1 percent) and that the estate tax exemption is $2 million (it is $11 million).


Self-identified Republicans generally believed that taxes are higher and more progressive than those who called themselves Democrats.


Respondents also were asked how they thought people responded to taxes. The three main ways: evasion, moving to a lower tax state, and working less and being less entrepreneurial. But they differed widely in how they’d personally respond and how they thought others would.



Overall, 80 percent believed that higher-income people were more likely to evade taxes, 43 percent said someone in a high-income household would work less, and 78 percent said wealthy taxpayers would move to a lower-tax state.


However, when asked what they personally would do, their responses were much less dramatic. Twenty-eight percent said they’d evade taxes, 33 percent said they’d work less, and 55 percent said they’d move. 


But there once again was big variation by political party. Republicans believed there was a much bigger behavioral response to taxes than Democrats. With one notable exception: GOP respondents were a bit less likely than Democrats to say that high-income taxpayers would evade taxes.


Responses were similar for the estate tax. Overall, respondents felt that 88 percent of the wealthy would evade these levies. When asked about their own responses, 38 percent said they’d evade estate taxes (though in reality, almost none will ever have the chance).   


What is fair?

Fairness was a major concern for those surveyed. But framing fairness in different ways generated very different responses. Most respondents thought people making the same amount of income should pay the same amount of tax, so the value of horizontal equity seemed widely shared. But if fairness was described as using the income tax to more evenly distribute money and wealth, responses were far more partisan.


More than 90 percent of surveyed Democrats said wealth and money should be more evenly distributed in the US, more than twice the percentage of Republicans. At the same time, 55 percent of Republicans said the wealthy are entitled to keep their income while only 10 percent of Democrats felt that way.


When it came to the estate tax, respondents had different views about decedents and their children. They seemed more inclined to say that people should be able to pass on all their wealth to heirs than to favor the idea that the children of the wealthy should receive all their assets.  


Overall, there was a huge partisan gap in response to the question of whether people are satisfied with the current tax system: Nearly half of Republicans said they were, compared to only one-in-five Democrats. This may reflect, in part, the highly partisan nature of the Tax Cuts and Jobs Act that Congress passed in 2017.


How are taxes spent?

Most interesting, views on taxes seem affected in large part by perceptions of how government spends money.


Asked if they’d support raising taxes to help support low-income households, 80 percent of Democrats said yes while only 39 percent of Republicans agreed. But asked if they’d back taxes to support increased public investment, the gap narrowed significantly. Fifty-nine percent of Democrats agreed with that approach, as did 48 percent of Republicans.


Stantcheva surveyed nearly 2,800 adults on the income tax and about 2,400 on the estate tax. The surveys were conducted in February and May of 2019.


Many of her conclusions confirm earlier research, but her paper includes some valuable insights. It is worth reading, both by tax policy analysts and politicians.




IRS Will Pay Up To $625,000 If You Can Crack Monero, Other Privacy Coins

Kelly Phillips Erb


When the Internal Revenue Service (IRS) signaled that it was getting serious about cryptocurrency, the agency wasn’t kidding. The IRS is now offering cash to anyone who can “reliably produce useful results on a variety of real-world CI cryptocurrency investigations involving Monero and/or Lightning.” That’s right: they are looking for code crackers.


The IRS has made no secret that it believes that taxpayers are not correctly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, when IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.


Cryptocurrency Compliance Efforts

A new cryptocurrency compliance measure for taxpayers was introduced in 2019 in the form of a checkbox on the top of Schedule 1, Additional Income and Adjustments to Income (Schedule 1 is used to report income or adjustments to income that can't be entered directly on the front page of form 1040). And in 2020, the IRS noted that it will post a cryptocurrency question right on the front page of your Form 1040.


In 2019, the IRS also announced that it was sending letters to taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

(For more on some of those efforts - like the Coinbase court saga - click here.)


Now, the IRS is offering what some are calling a “bounty” to those who can assist in tracing cryptocurrency transactions. Specifically, the IRS has created a pilot that will pay cash (up to $625,000) to anyone who can trace Monero or other anonymity-enhanced cryptocurrency, or Lightning or other Layer 2 off-chain cryptocurrency protocols.


You can read the official Request for Proposals (RFP) here (you can also find out more about the process).


The deadline for submissions is Wednesday, September 16, 2020, at 08:00 EDT. No late submissions will be accepted or considered or evaluated.


About Privacy Coins

The focus of the proposal is privacy coins. Privacy coins allow users more anonymity when using cryptocurrency. According to the IRS-CI, the use of privacy coins is becoming more popular not only by investors, but also by illicit actors. For example, according to the IRS-CI, in April 2020, a RaaS (Ransomware as a Service) group called Sodinokibi (a former affiliate with the GrandCrab RaaS group) stated that future ransom request payments will be in Monero (XMR) rather than Bitcoin (BTC) due to transaction privacy concerns.


Bitcoin has become increasingly common since it’s easy to use - even for relative crypto newbies. Bitcoin transactions are open ledger (blockchain): that means that the record-keeping system is “public” through a series or chain of blocks even though the exact identities of the participants (as well as their other details, like account balances) may remain private. This kind of open system encourages transparency but also means that, with some effort, hackers and others - like the authorities - can track down the players in a chain of transactions. 


The result has been a push from some crypto-sectors to completely anonymize all pieces of the transaction. Enter privacy coins. Monero is considered the largest privacy coin on the market right now; the technology it uses extends privacy to senders, receivers, and transaction amounts. Other popular privacy coins include Cash (ZEC) and Dash.


IRS-CI Is Looking For Solutions

Now, IRS-CI is looking for solutions which provide “information and technical capabilities for CI Special Agents to trace transaction inputs and outputs to a specific user and differentiate them from mixins/multisig actors for Monero and/or Lightning Layer 2 cryptocurrency transactions with minimal involvement of external vendors” as well as “technology which, given information about specific parties and/or transactions in the Monero and/or Lightning networks, allows Special Agents to predict statistical likelihoods of other transaction inputs, outputs, metadata, and public identifiers with minimal involvement of external vendors.” In other words, they are looking to crack privacy coins.


If this sounds out of the ordinary, you’re not wrong. And the IRS acknowledges as much, stating, “For those who are familiar with traditional government procurements, Pilot IRS will appear substantively different from how the government normally buys technology. To be fair, it is… This type of approach is more often used in research and development environments, but there are existing regulations that allow federal agencies to buy commercial items in a manner similar with how the private sector would. Pilot IRS will aggressively pursue a streamlined and cost-effective approach to testing and deploying technology solutions that will have an immediate impact on the government’s mission.” 


IRS-CI has noted an uptick in criminal syndicates using privacy coins. And authorities have to be able to keep up. An IRS-CI spokesperson stated that, “IRS-CI is responsible for investigating potential criminal violations of the U.S. Internal Revenue Code and related financial crimes. We are also a global leader in cyber-criminal investigations involving cryptocurrency and have played a lead or key role in the takedown of numerous major Darknet Marketplaces and other transnational criminal organizations facilitating identify theft, narcotics trafficking, money laundering, terrorist financing, sex trafficking, and child prostitution.”


As a result, he explained, “The IRS Cryptocurrency pilot was developed to create and promote innovation in response to ongoing challenges within IRS-CI in hopes of quickly testing, piloting and/or deploying solutions. Privacy coins continue to be a challenge to law enforcement due to their increased anonymity and specific technological enhancements. Currently, there are limited investigative resources for tracing transactions involving privacy cryptocurrency coins such as Monero, Layer 2 network protocol transactions such as Lightning Labs, or other off-chain transactions that provide privacy to illicit actors. The pilot will look to leverage the knowledge of public/private sector and academia to address these specific challenges.”




CFOs expect corporate tax rates to go up after election

By Michael Cohn


A majority of CFOs and other C-suite executives anticipate corporate tax rates will rise after the election, no matter whether Donald Trump or Joe Biden wins in November, according to a new survey by PricewaterhouseCoopers.


PwC’s Road to Election 2020 Pulse Survey polled 578 CFOs and other executives to determine the general election’s impact on the business environment. The survey found that if Biden wins, more executives are likely to increase their efforts around tax planning in anticipation of changes to U.S. corporate tax and other tax policies. If Trump is re-elected, more executives are likely to increase investments in their companies’ supply chains, given the tensions between the U.S. and China over trade. Nevertheless, no matter which party controls Congress or the White House, 70 percent of the respondents believe that business tax rates will rise to pay for COVID-19 relief, and 63 percent predicted trade restrictions between the U.S. and China will continue.


More executives are likely to increase their investments in tax scenario planning in the event of a new administration, at 57 percent for a new administration under Biden, as opposed to 43 percent if the Trump administration remains in office. Companies are also investing as they look to a future beyond COVID-19.


“Companies are making decisions for the future and investing to be stronger coming out of the pandemic,” said PwC U.S. senior partner and chair Tim Ryan during a conference call with reporters Tuesday. “There’s a significant focus on the workforce and what the workforce of the future looks like. This discussion has moved well beyond remote versus non-remote, but what does the model look like going forward. That means where work can be done, how work can be automated, how you’re handling culture and development at the same time, and also how do you create a flexible environment to attract the best talent. We are seeing companies look to the future and ask what does that model look like moving forward, and that has become very much a C-suite issue.”


He is seeing more companies investing in technology such as artificial intelligence and the Internet of Things, or IoT, and examining issues like diversity and inclusion in the wake of the Black Lives Matter protests over the killing of George Floyd and other Black Americans.


In the event of a second term of the Trump administration, more executives believe investments in their supply chains will increase (45 percent for the current administration vs. 37 percent for new administration). Regardless of the outcome of the U.S. election, 70 percent of the respondents agree that business tax rates will rise to pay for COVID-19 relief, regardless of the outcome of the election, with 35 percent saying they are in “strong agreement.”


“The result that I found a little bit surprising was the one that said 70 percent of those surveyed agreed that business tax rates will rise to pay for COVID-19 relief, regardless of the outcome of the election,” said Rohit Kumar, co-leader of PwC’s national tax office and former deputy chief of staff to Mitch McConnell. “At least as it relates to federal taxes, this surprised me because I’m fairly certain that if Republicans keep the Senate, then Mitch McConnell, the Senate Majority Leader, would not be open to increasing business taxes. I think executives are understandably reacting to the historic amount of deficit spending that COVID-19 has generated, so it’s natural that businesses will be asked to help shoulder the burden. That might eventually be the case, but so long as we have divided government, the odds of significant business tax changes at the federal level remain pretty remote.”


He acknowledged, however, that states may be forced to raise taxes to balance their budgets and other countries may raise taxes overseas. Trade tensions could also add to tariffs and supply chain problems.


“Focusing on the results of the upcoming election, one of the things we found interesting was that a majority of C-suite leaders believe corporate tax rates will rise and trade tensions will increase, regardless of the election outcome,” said Roz Brooks, U.S. public policy leader at PwC.

The executives surveyed think some type of fiscal COVID-19-related policy support is needed for the U.S. economy (95 percent) and for their businesses (78 percent).


While revenue forecasts have improved over the past few months as companies have adapted to operate in a COVID-19 environment, more than half the respondents (56 percent) still expect their company’s revenue and/or profits to decrease over the next 12 months as a result of the pandemic.


Nevertheless, 28 percent of the CFOs and other C-suite leaders polled by PwC expect an increase in revenue over the same period. As the general election approaches, the business leaders who responded to the survey would like the federal government to take action to help improve the current business environment. A majority of respondents indicated that a federal strategy to combat the pandemic is needed to boost consumer confidence (82 percent) and increase domestic production of essential goods (81 percent).


C-suite leaders acknowledge that investments are crucial to competitiveness in 2021 as they work to factor in responsiveness to various policy shifts. Sixty-three percent of the poll respondents predicted that trade restrictions between the U.S. and China would increase next year, regardless of the outcome of the election, while 28 percent “strongly agree.”


In terms of a desire for further federal support, 95 percent of the executives polled said some type of policy action is needed for the U.S. economy to help recover from the economic effects of the pandemic, but 20 percent said their own business needs no further fiscal policy support.


Eighty-one percent of the respondents said the federal government should implement a strategy to boost domestic production of essential goods to help the U.S. economy, and 46 percent said they “strongly agree.”


Separately, the PwC global network of firms announced a sustainability commitment Tuesday to net zero emissions by 2030. The firms committed to reducing their total greenhouse gas emissions by 50 percent in absolute terms by 2030. That includes a switch to 100 percent renewable electricity in all territories, as well as energy efficiency improvements in their offices and halving the emissions associated with business travel and accommodation within a decade. PwC’s global network also plans to invest in carbon removal projects, including natural climate solutions. For every remaining ton (CO2 equivalent) that’s emitted, PwC committed to remove a ton of carbon dioxide from the atmosphere, to achieve a net zero climate impact by 2030.




Millionaires would pay up under Biden, study shows

By Laura Davison


Millionaires could see much bigger tax bills if Democrat Joe Biden is elected president in November, but levies on most households below the top income brackets would stay about the same as under President Donald Trump, an outside analysis shows.


Biden’s tax proposals would have the top 0.1 percent of earners — those currently making about $3.3 million or more annually — paying a 43 percent rate on their income, according to the Penn Wharton Budget Model. That top group pays a rate of about 30.6 percent under Trump’s 2017 tax law, according to the report, which accounts for income, payroll and corporate duties.


The figures highlight the key dividing line between the two candidates when it comes to taxes. The Trump campaign has run ads saying Biden’s increases would crush middle-class families, but the data show there would be little effect for most who earn less than $400,000. Trump has said he wants to cut taxes again, but hasn’t released a plan on how he would do that.

Biden’s platform would increase the top rate to 39.6 percent, where it was before Trump’s overhaul pared it to 37 percent. The Democrat would also tax capital gains earnings the same as regular income for top earners, and impose an additional payroll levy on incomes above $400,000. Payroll taxes are currently only paid on the first $137,700 of income. About 80 percent of Biden’s increases would fall on the top 1 percent of earners, or those earning at least $710,000, according to the report.


The biggest tax increases in the Biden plan are the corporate tax at $1.4 trillion over the 10-year budget window, followed by the payroll tax at $992.8 billion and the individual income tax at $944 billion, according to the study.


Biden would do little to tinker with the tax obligations of those earning less than $400,000 a year. Middle-income households would see slightly higher rates due to indirect effects of higher corporate taxes. For example, the middle 20 percent of earners, who now pay an effective tax rate of 16.9 percent, would owe 17.3 percent under Biden.


“There is a tax increase on the lower earners, but it’s small and it’s through those indirect tax effects,” said Richard Prisinzano, director of policy analysis at the Penn Wharton Budget Model.

Proposed tax rates under Biden’s plans are far lower than some touted by more progressive Democrats. Senator Bernie Sanders, who battled Biden for the party’s nomination before endorsing him, proposed rates as high as 97.5 percent on some of the richest Americans. Representative Alexandria Ocasio-Cortez of New York has called for taxing income above $10 million at 70 percent.


Biden’s plans would raise $3.4 trillion over the next decade, or some $2 trillion dollars short of covering the $5.4 trillion price tag for his spending programs, the analysis showed. But after accounting for the macroeconomic effects of his immigration, infrastructure, health and other proposals, federal debt would decrease by 6.1 percent and gross domestic product would rise by 0.8 percent by 2050 relative to current law, according to the report.


The Penn Wharton Budget Model is a nonpartisan, research-based initiative that provides economic analysis of the fiscal impact of public policy, according to its website. The group describes its goal as “providing rigorous analysis without policy advocacy.”




Focused conversion: A strategy for IRAs

See how moving certain assets from IRAs to Roth IRAs may help save on taxes.



Key takeaways

  • One approach to help save on taxes is to do a so-called "focused conversion" of assets in an IRA.
  • When you're in a lower tax bracket than usual, you may be in a better position to convert assets to a Roth IRA.
  • Converting certain IRA assets to Roth IRA assets can help boost after-tax retirement income, and reduce future required minimum distributions (RMDs) at age 72, since RMDs do not apply to Roth IRAs.


While everyone's risk tolerance, retirement horizon, and lifestyles are different, most everyone is interested in saving money on taxes. If you are holding investments in a traditional IRA and you think you may be in a lower tax bracket this year than you might be in the future, then a "focused conversion" may be a strategy to consider. "Converting while your tax bracket is down temporarily is like shopping during a sales tax holiday—everything is cheaper," explains Mitch Pomerance, CFP®, CFA, a Fidelity advisor based in Danvers, Massachusetts. "But unlike the tax savings on buying a new outfit during a sales tax holiday, the benefits of converting while you're in a lower bracket compound year after year. It's like getting a tax break that grows over time."


When asset prices are down, this approach may allow you to pay less in taxes on the converted amount than you otherwise would. Over time, those savings, coupled with the power of compounded, tax-free growth in a Roth account may mean more retirement security, higher retirement income, and a larger legacy for you and your loved ones.


How a focused conversion works


A focused conversion is a financial planning technique that is designed to improve after-tax returns for investments in traditional IRAs. In a nutshell, it involves 4 steps:

  1. Waiting for a year in which the investor is in a lower tax bracket than usual
  2. Identifying 2 investments—one to be sold and another to be bought in its place
  3. Selling the first investment and converting the proceeds to a Roth IRA (paying for the cost of conversion using assets in a taxable account)
  4. Purchasing the second investment in the Roth IRA.


A hypothetical example

Meet Joyce. She's 73, retired, and files her taxes jointly with her spouse. She has a traditional IRA as well as several other accounts that total about $1,000,000. Last year, between required minimum distributions (RMDs) of $40,000, Social Security income of about $50,000 (for herself and her spouse), and income from an annuity, rental real estate, and other recurring sources of about $30,000, her total household income was around $120,000. This put her in the 22% federal income tax bracket, which in 2020 applies to taxable income (that is, income after all deductions, exemptions, and exclusions) of $80,250 to $171,050 for joint filers.


But this year, because she plans to skip her RMD as permitted under the CARES Act, Joyce's total household income will be considerably lower (and since she and her spouse won't be doing any travel this year, the reduced income won't be a problem).


As a result, after the standard deduction of $24,800 (plus $2,600 because of her and her spouse's age), her estimated income this year should put her in the 12% bracket (taxable income of $19,750 to $80,250 in 2020). After this year, with the resumption of RMDs, she expects her tax bracket to return to 22%.


Looking for opportunities to rebalance

Joyce holds a variety of funds in her traditional IRA, and she rebalances it regularly in order to stay as close as possible to her targeted asset allocation. Because of a recent decline in interest rates, Joyce's portfolio is out of balance: Her fixed income allocation is too high and her equity allocation is too low, based on the objectives of her financial plan.


With a rebalancing strategy in mind, Joyce plans to place a number of trades, including a sale of $10,000 of a hypothetical Bond Fund ABC and a purchase of $10,000 of a hypothetical Equity Fund XYZ. Joyce also has $1,200 currently in cash in a brokerage account, which unlike her IRA does not have a specific targeted asset allocation and is not rebalanced regularly. She thinks of the brokerage account as her "play money" and sometimes uses it to speculate in individual stocks. But since Joyce is anticipating a broadly rising market for equities, rather than buying individual stocks, she is inclined to invest her brokerage account money in XYZ as well. She is considering 2 options:


  1. A conventional rebalancing trade. She would sell $10,000 of Bond Fund ABC and buy $10,000 of Equity Fund XYZ in her traditional IRA. Let's assume, for purposes of the illustration, that she would then use her brokerage account to buy $1,200 more of XYZ in her traditional IRA.
  2. A focused conversion. She would sell $10,000 of ABC in her traditional IRA but then convert this amount to a Roth IRA, and purchase $10,000 in XYZ shares in her Roth IRA. (Note that Joyce considers the Roth IRA and the traditional IRA as a single portfolio for asset allocation purposes.) This trade would cost her $1,200 (or $10,000 times 12%, her 2020 marginal tax rate) in current year tax cost, and she would cover this using the cash in her brokerage account.


At first blush, if the equity market does rally, one might think Option 1 would be better than Option 2. After all, Option 1 would allow Joyce to buy a total of $11,200 of XYZ rather than just $10,000. But let's consider what would happen if, in a highly simplified and purely hypothetical example, the market does very well, and 10 years from now a $10,000 investment in XYZ has tripled and so is worth $30,000 (implying a compound annual return of 11.61%). Given the same growth, the brokerage account investment would have reached $3,600. And let's assume around that time, Joyce would withdraw and spend the assets.


Option 1: Conventional rebalancing trade


Value today

Tax paid today

Value in
year 10

Tax burden,
year 10

After-tax value,
year 10

Traditional IRA






Brokerage account












Option 2: Focused conversion


Value today

Tax paid today

Value in
year 10

Tax burden,
year 10

After-tax value,
year 10

Roth IRA






Benefit of focused conversion (Option 2 minus Option 1)



For illustrative purposes only.

*Withdrawals from the traditional IRA in year 10 are assumed to be taxed at a 22% rate.
**Liquidation of capital gains in the brokerage account in year 10 are assumed to be taxed at a 15% rate. This rate is applied to the gain of $2,400, which corresponds to the ending balance of $3,600 minus the starting value of $1,200.


Even though it starts with a smaller investment in XYZ, Option 2 would leave Joyce with $3,360 more than Option 1—an improvement of more than 12.5%. Why? Because while Option 1 does allow Joyce to purchase more of XYZ, it also leaves her with a tax bill that's so much higher, resulting in her giving back all the additional gains—and then some.


10 years out: The potential impact of dividends and capital gains


What if XYZ made dividend or capital gain distributions along the way, as many equity funds do? The after-tax value of the investment in the brokerage account would effectively be somewhat less than the $3,240 assumed here because those distributions would be taxed. So in fact, the benefit from conversion would probably be somewhat larger than $3,360. What if the some of the withdrawals took place not in year 10, but later? There would be additional growth, and the benefit of conversion would also be larger.


Conversely, what if the equity markets do not perform well, and the XYZ IRA investments end up being worth $10,000—the same as today? It turns out Joyce would still be better off under Option 2 in this scenario.


Option 1: Conventional rebalancing trade


Value today

Tax paid today

Value in
year 10

Tax burden,
year 10

After-tax value,
year 10

Traditional IRA






Brokerage account












Option 2: Focused conversion


Value today

Tax paid today

Value in
year 10

Tax burden,
year 10

After-tax value,
year 10

Roth IRA






Benefit of focused conversion (Option 2 minus Option 1)


For illustrative purposes only.

*Withdrawals from the traditional IRA in year 10 are assumed to be taxed at a 22% rate.
**Liquidation of capital gains in the brokerage account in year 10 are assumed to be taxed at a 15% rate.


Nevertheless, when it comes to financial planning, there are details that can make things a bit more complicated. In our first scenario, since the value of her investment in XYZ triples, Joyce may need to rebalance again, so she might not be able to keep all of her investment in XYZ. That could reduce the size of the advantage of Option 2.


"Remember, a focused conversion isn't foolproof," says Pomerance. "It's possible that a future reduction in tax rates or some other change in tax law could mean that the benefits of focused conversion could be reduced or even eliminated. The overall goal for most people doing a focused conversion would be that their future taxable income could be lowered."


Bumping up against net investment income thresholds

In addition, there are several other factors that could make focused conversion even more attractive. For example, qualified distributions from a Roth IRA are not counted for purposes of figuring the taxation of Social Security benefits, which might be an important additional benefit for those with lower incomes than Joyce. For those with higher incomes, this strategy may help keep income levels below certain thresholds, which could reduce Medicare premiums (sometimes referred to as the income-related monthly adjustment amount, or IRMAA) and/or the 3.8% Medicare surcharge (see chart). Finally, Roth IRAs aren't subject to RMDs during the original owner's lifetime, so Roth conversion may also help investors avoid taking IRA withdrawals (and generating tax liability) that they don't need.


3.8% Medicare surcharge threshold amounts

Tax filing status

Threshold MAGI* level

Married filing jointly


Married filing separately




Head of household (with qualifying person)


Qualifying widow(er) with dependent child


* Modified Adjusted Gross Income


Since the details can make a difference in determining taxes paid over a number of years, it's a good idea to consult with a tax advisor or a financial professional before implementing a focused conversion. That can help make sure that you've considered all the possibilities and that the strategy fits into your broader financial plan.





8 tax areas to factor into divorce negotiations

By Jay H. Freeberg


Let’s face it: We marry for love, but when it comes to a divorce, the focus is solely on money. This article addresses eight “under the radar” tactics that your client’s spouse may try to use to affect their net worth, which will directly affect your client’s final financial settlement. Clients heading into a divorce need to be aware of these so that they can gain assurance that all aspects of their spouse’s financial assets are fairly and accurately valued and disclosed on their net worth statement. This will enable them and their attorney to properly and equitably split the couple’s joint assets as needed.


The eight categories below to be the least discussed items during a divorce proceeding, but they can also have the biggest impact on your client’s final settlement. When it comes to divorce, knowing all of the financial issues and how you address them will ensure that your client comes out of the marriage in strong financial condition.


P.S. 58 costs


When an employer pays the premium on a life insurance policy for the benefit of an employee, the “P.S. 58 costs” are normally applied to determine the taxable benefit passing to the insured employee. Such costs are documented by a Form 1099-R, with a distribution code “9” marked on the 1099-R. The dollar amount of the 1099-R is usually immaterial, but it may translate to a large insurance policy.

Why is this important and what to be aware of:Many divorce agreements require that life insurance be held until certain conditions/terms are met. So, if there is an existing policy already in place with your client’s spouse’s employer, this will likely reduce the need for a new or additional policy. Also, depending on the type of underlying insurance policy that the employer purchased (e.g., term or whole life), the policy may have some cash value, which will be an additional marital asset to be split. Furthermore, if there is a policy in place, your client will want to confirm who is selected as a beneficiary on the policy. It is important to understand that the beneficiary elections on a life insurance policy work slightly differently than the beneficiary elections on a retirement account. For a retirement account, if your client is married, their spouse must select them as the primary beneficiary of the account. If they don’t select the spouse, then the spouse must agree to it in writing. Conversely, for a life insurance policy, anyone can be selected as the primary beneficiary. So, if your client’s spouse has a life insurance policy through work, they are not required to select your client as the beneficiary. Check it out.


$15,000 annual gift limit

Presently, the annual federal gift limit is set at $15,000. This means that, each year, taxpayers can give up to $15,000 to anyone they want — without any income or gift tax implications. Keep in mind that the recipient will pay tax on any income they earn from this money in the future, but they do not have to pay any tax on the actual gifted money when they receive it. Your client’s spouse is excluded from this as unlimited gifting is allowed between spouses.

Why is this important and what to be aware of:As an example, if your client’s spouse gave a friend $25,000 — first, they likely excluded the full amount from their net worth statement and chances are that they also didn’t file a gift tax return — both are problems. Excluding the assets from their net worth is the big concern here, and it is critical that these funds are included and part of any settlement. So, chances are your client’s spouse has been giving money to their friends and family, in excess of the annual limit to reduce their net worth.


Applicable federal rates

If you lend your nephew $100,000, you must include interest to make it stand up as a valid loan. In this instance, many people would use the IRS applicable federal rates which represent the absolute minimum market rate of interest a lender could consider charging a borrower in order to prevent unnecessary tax complications. There are three AFR tiers — short-term (for loans with a repayment term up to three years), mid-term (loans with a repayment term between three and nine years) and long-term rates (for loans with a repayment term greater than nine years).

Why is this important and what to be aware of:If your client’s spouse is claiming that someone has lent them money, this will directly reduce their net worth and they likely reported it as a liability on their net worth statement. Any loan they report on their net worth statement needs to have supporting documentation. So, the first thing to check is to see if the loan documents include an interest rate, at least at the minimum AFR rate corresponding to the term of the loan. If not, then this is not a valid loan, and the amount should be added back to their net worth statement and be deemed part of their assets.

Section 179

This is the IRS section that allows a taxpayer’s business to deduct the cost of certain property as an expense when the property is placed in service. Generally, this applies to real property, improvements and tangible personal property such as machinery and equipment purchased for use in a trade or business. For example, if your client’s spouse owns a business and right before year end, the business purchases $50,000 of equipment, the tax laws allow the business to take an immediate tax deduction for this, as long the equipment was placed in service.

Why is this important and what to be aware of:If your client’s spouse is claiming that the business had lower profits last year and therefore their business is worth a lot less, they need to examine the business tax return. It is possible that their spouse took advantage of Section 179 depreciation, which reduced the business net taxable income. But their spouse may be trying to cheat them. Most business valuations look at earnings before interest, taxes, depreciation and amortization, so the value of the business likely should not change materially due to a Section 179 deduction. In fact, the business may likely be worth more — because they just added a key asset that will help the business grow faster or be more efficient.


Form 1099-MISC

The Form 1099-MISC, which is filed by a business to report payments from a business to independent contractors, is changing for 2020, to a new Form 1099-NEC. So, if a business engages independent contractors, be it for professional fees, rent or other services, and that independent contractor or entity is an unincorporated business, to “validate” the business deduction, the business will need to prepare and file a 1099-MISC form with the IRS. This lets the IRS know that the business incurred a business deduction (still subject to an audit by the IRS as to whether it was a valid expense, but this is a separate issue), and the recipient of the form should include it in their income.

Why is this important and what to be aware of: While doing due diligence on the records of their spouse’s business, if your client finds that payments were made and a 1099-MISC Form was not prepared, then their spouse is likely trying to reduce their business income with non-business expenses. These amounts should be added to the net income of the business and will likely increase the value of the business.


529 plans

Contributions to 529 college savings plans are covered under the gift tax rules — the $15,000 annual maximum outlined above — with one exception. Individuals may contribute as much as $75,000 to a 529 plan in 2020, if they treat the contributions as if it were spread over a five-year period. Please keep in mind that if a taxpayer contributes $15,000 into a 529 plan for a child, they cannot then also gift more money to them outside of this, since they already hit the maximum gift for the year, or they must file a gift tax return.

Why is this important and what to be aware of:Legally, once the funds are deposited into the 529 account, the funds belong to the beneficiary, likely your client’s child. Many times the spouse thinks the funds are theirs and will try to withdraw the funds from the 529 account at a later date, without telling the child, and not use it for the child’s education — treating it as their own money. Your client needs to make sure that these accounts are tracked and that the funds are used for their original intent, to fund their child’s education.


1031 exchange

Section 1031 allows a taxpayer to avoid paying capital gains taxes upfront when they sell an investment property, if they reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value. Simply put, this strategy allows an investor to defer paying capital gains taxes on an investment property when it is sold.

Why is this important and what to be aware of:It is critical to understand the correct tax basis of each property to ensure that assets are split equitably. For example, let’s assume you client owns two investment properties, each with a fair market value of $1 million. Both properties were purchased at a cost of $900,000. One property was recently purchased for cash and the second property was acquired using a 1031 exchange where your client deferred $500,000 of gain, from a property they owned for many years. If they sold the first property, they would have a taxable gain of $100,000. If they sold the second, their taxable gain would be $500,000. While these properties are equal in current fair market value, they are not equal in after tax fair market value — which is critical to a fair and equitable split of assets.


Equity-based compensation and awards

Equity-based compensation comes in many forms, including stock options, restricted stock, stock appreciation rights and even partnership interests or shares in a professional corporation. Most equity-based compensation awards are made pursuant to some form of written plan. The plan will provide a full understanding of compensation, including the value and terms of the awards. Vesting rules and transferability limitations are also crucial. Vesting is, in effect, when the award is actually “owned” by the recipient. So, if the award is for $100, but the employee is only 25 percent vested, they really only own $25. The key issue is to understand when they “own” the other $75. Transferability refers to the rights and limitations around the ability to transfer the ownership of the award to others.

Why is this important and what to be aware of:Equity awards are complicated rights governed by multiple authorities. They can be a significant portion of the marital estate. Unfortunately there is no method of valuation of equity awards that is widely recognized and accepted — so, your client should be prepared for multiple rounds of information gathering and analysis. Just understand that many award-related actions have a taxable impact, many of which are very significant.




Game plan now for potential higher taxes

By Roger Russell


Whether or not you believe the polls, it’s evident that the November 2020 election may usher in a change in the executive and legislative branches that could result in higher taxes for many. As a result, it makes sense for tax professionals to plan and take any actions that might be available to lessen potential adverse effects on their clients.

New presidents typically do get their tax plan enacted during their first year, according to Mark Luscombe, a CPA, attorney, and principal analyst for Wolters Kluwer Tax & Accounting.


“They have a pretty good record of getting things through during their first year in office,” he said. “If Biden wins and gets his tax plan enacted, it’s likely that it will bring higher taxes. But assuming it’s passed in 2021, any legislation probably won’t be effective until 2022. Congress seems to be hesitant to make tax hikes retroactive.”


Among other items, a tax increase proposed by Biden would restore the 39.6 percent rate for income over $400,000, and the elimination of capital gains treatment and qualified dividend preference for income over $1 million, Luscombe noted, adding, “He would also limit total itemized deductions so they do not exceed 28 percent. People in brackets over 28 percent would basically not get more than 28 percent of the benefit of itemized deductions.”


Taxes either way

Whoever wins the presidency, it is likely that higher taxes are in the offing, predicted Glenn DiBenedetto, a CPA and director of tax planning at New England Investment & Retirement Group.


“It seems inevitable with COVID that we’re looking at a potential raise in taxes,” he said. “California has proposed an increase in their tax rates via a progressive surcharge on seven-figure earners which would increase the tax rate on the highest bracket from 13.3 percent to as high as 16.8 percent in 2021, retroactive to the first of the year.”


The potential return to the pre-Tax Cuts and Jobs Act rates — which is slated to occur in 2026 even if not accelerated by the election results — makes tax bracket planning even more necessary for 2020, according to DiBenedetto: “It is important to project what bracket a taxpayer will be in two or three years from now. A lot of high-income people might look at accelerating income into 2020 in the event there is any political change.”


“Also consider maximizing the 2020 distributions from retirement accounts to take advantage of the benefits of a lower tax bracket,” he suggested. “For example, you could take a distribution in 2020 despite potentially having required minimum distributions waived under the SECURE Act.”


Current long-term capital gains and qualified dividends are taxed at 0 percent, 15 percent, or 20 percent, based on taxable income, he noted. “Taxpayers should review harvesting long-term gains to lock in the current low rates which will potentially increase,” DiBenedetto said.


The 12.4 percent Social Security tax for income above $400,000 would take a real bite out of the income of wealthy individuals, he observed. “Long-term capital gains and qualified dividends would be subject to tax at the ordinary income rate of 39.6 percent for those with income over $1 million, and the step-up in basis at death would be eliminated. Moreover, estate taxes would be headed higher with the reduction in the lifetime estate and gift tax exemption significantly reduced from its current amount,” he said.


“Estate taxes currently apply to the amount an estate’s value exceeds $11.58 million for a single person or $23.16 million for couples,” he said. “Although they are scheduled to sunset in 2026, given the mounting pressure to increase taxes, these exemption amounts could be lowered before they sunset.”


Therefore, DiBenedetto advised, “If a taxpayer is considering making a gift that would use up part or all of the exemption, now is the time to do it.”


Tate Taylor, a partner and chair of the private client services practice at Tampa-based Trenam Law, agreed. “The planning that we’re doing targeted to the high-net-worth community has its eye focused on elements of the Biden tax plan that would reduce the lifetime estate and gift tax exemption from its current level to those in place in 2009,” he said. “That $8 million difference in exemption amount currently translates into about $3.2 million in estate tax. People have started this year, if they have enough money, to make large gifts during life that would use up that exemption now, while it’s still available.”

Trust in trusts

One suggestion made by a number of professionals is to transfer assets to an irrevocable trust in return for a promissory note. If Biden wins the presidency, the transferor would forgive the promissory note.


“If Biden wins you’re locking in a gift by forgiving the note,” explained DiBenedetto.


“It’s a viable option,” agreed Taylor. “A lot of planners are doing this. It’s a way to put yourself in the position of making a last-minute decision of whether or not you want to pull the trigger. You can make a gift at the stroke of a pen at the end of the year.”


The other major policy shift in the Biden tax plan is the elimination of the step-up in basis at death, which allows heirs of the deceased to sell assets using the same basis that the decedent had.


“It’s something to take into consideration when making the decision as to when to sell assets,” said Taylor. “You can’t plan for death, but you can, in your investment priorities methodology, take into account the fact that the heirs might not have the same basis as the decedent when they go to sell the asset they inherit. It may be advisable to sell the asset before death to wipe out any gains to the heirs.”


“In a lot of ways, right now is a good time to do transfer tax planning,” agreed Ed Renn, senior equity partner at international law firm Withers. “With the exception of the stock market, we generally have depressed asset values. We’re seeing significantly less appetite for risk, resulting in bigger discounts for marketability. To put a number on it, if you expected a 30 percent discount in January 2020, it would be at 45 percent now.”


“The reality is that planning is not a simple process,” Renn said. “If you want a particular child to run a business, that has to be addressed now.”


And there’s no certainty that any increases won’t be retroactive to Jan. 1, 2021, Renn cautioned. “There are only 59 days between the election and Jan. 1, 2021,” he said. “A ‘blue wave’ — the White House, Senate and House all going to the Democrats — could result in increased rates effective as of that date. If the Republicans hold on to enough Senate seats, this won’t happen, but if the Democrats take everything, there will be a major reset in the way taxes will be handled and who will pay them.”


For details of the presidential candidates' tax policies for individuals, see our comparison.




How to plan for rising health care costs

Estimated cost for health care post-age 65? Try $295,000 per couple in assets needed today.



Key takeaways

  • Health care continues to be one of the largest expenses in retirement.
  • It is estimated that the average couple will need $295,0001 in today's dollars for medical expenses in retirement, excluding long-term care.
  • To help fill a gap in saving for health care expenses, consider increasing contributions to your tax-advantaged accounts, especially HSAs (if you have one), which enable tax-free spending on health care in retirement.*

*Health savings account (HSA) contributions, earnings, and distributions used to pay for qualified medical expenses are tax-free for federal income tax purposes.


If you are like most Americans, health care is expected to be one of your largest expenses in retirement, after housing and transportation costs. But unlike your parents' generation, you won't likely have access to employer- or union-sponsored retiree health benefits. So, health care costs will likely consume a larger portion of your retirement budget—and you need to plan for that.


There are a number of drivers behind this mounting retirement health care cost challenge. In general, people are living longer, health care inflation continues to outpace the rate of general inflation, and the average retirement age is 62 for most Americans—that's 3 years before you are eligible to enroll in Medicare.


"Health care is creating a 'retirement cost gap' for many pre-retirees," says Steve Feinschreiber, senior vice president of the Financial Solutions Group at Fidelity. "Many people assume Medicare will cover all your health care cost in retirement, but it doesn't. We estimate that about 15% of the average retiree's annual expenses will be used for health care-related expenses,2 including Medicare premiums and out-of-pocket expenses. So, you should carefully weigh all options."


How much is needed for health care costs in retirement?


According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2020 may need approximately $295,000 saved (after tax) to cover health care expenses in retirement.


Of course, the amount you’ll need will depend on when and where you retire, how healthy you are, and how long you live. The amount you need will also depend on which accounts you use to pay for health care—e.g., 401(k), HSA, IRA, or taxable accounts; your tax rates in retirement (see chart); and potentially even your gross income.3


Tip: If you're still working and your employer offers an HSA-eligible health plan, consider enrolling and contributing to a health savings account (HSA). An HSA can help you save tax-efficiently for health care costs in retirement. You can save pretax dollars (and possibly collect employer contributions), which have the potential to grow and be withdrawn tax-free for federal and state tax purposes if used for qualified medical expenses.4


Pre- and early retirees: Make the most of your time to prepare


As retirement nears, you will have several big decisions to make, including when to stop working, when to take Social Security, how to pay for health care, and how to generate cash flow from your retirement assets. These decisions are interconnected and could make a difference in your living costs and lifestyle in retirement—and when you can retire.


Approximately one-third of "early retirees" who claim Social Security at age 625 do so to help pay for health care expenses until they are eligible for Medicare coverage at age 65. But if you can postpone retirement or save enough to cover health care costs until 65, then you may be able to defer your Social Security benefits. Generally speaking, the longer you can wait until age 70 to take Social Security benefits, the more you can collect, assuming you live a long life.


If you're like most people, you probably don't have access to employer-sponsored pre-65 retiree medical coverage. So if you retire prior to age 65, you'll need to find coverage until you are eligible for Medicare. Consider these options that may be available to you (see table).

Read Viewpoints on Your bridge to Medicare



COBRA continuation

Spouse's health plan

Public marketplace

Private insurance

Target audience

Former employees

Eligible spouses/partners of covered employees



Estimated cost






Few employers subsidize COBRA; you may pay the full cost of the coverage

Not all employers offer this benefit; special rules or surcharges may apply

You may qualify for federal assistance based on your income

Your former employer might provide a reimbursement account that can help you afford the cost of these plans


Turning 65 and retiring: Consider Medicare and other options


When you get close to age 65, spend some time reviewing and considering all your Medicare options. When you do become eligible at age 65, you'll want to remember to sign up during your 7-month initial enrollment period that begins 3 months before the month you turn 65.


There's a lot to learn about the world of Medicare. You'll need to know about Medicare Parts A, B, and D, as well as Medicare Advantage and "Medigap" supplemental insurance plans.


In brief:

  • Part A covers hospital costs after you meet a deductible.
  • Part B is optional coverage for medical expenses and requires an annual premium. Part D is for prescription drug coverage.
  • Medicare Advantage plans are all-in-one managed care plans that provide the services covered under Part A and Part B of Medicare and may also cover other services that are not covered under Parts A and B, including Part D prescription drug coverage.
  • Supplemental policies, referred to as Medigap policies, are offered by private insurance companies to supplement expenses that Medicare Parts A and B do not typically cover.


Tip: You may be better off paying a higher premium but not having to pay out-of-pocket at your office visits. Look at the cost of annual premiums and co-pays at different levels of supplemental insurance. Compare these costs. Then factor in the number of visits and co-pay/co-insurance per visit that you anticipate for the next year.


Once you select a Medicare plan, it's not forever. You can switch Medicare plans as you age and as your situation changes. Generally, it makes sense to enroll in Medicare Parts A, B, and D when you are first eligible because the late enrollment penalty for doing so later is steep (see next section if you are continuing to work after age 65).

Where does the retirees health care money go? Drugs, Medicare and other medical expenses.


Turning 65 and still gainfully employed (or your spouse/partner is)


If you're still working when you're 65 and get health insurance through your employer or your spouse's employer, you'll have the opportunity to enroll in Medicare when you leave your employer plan through a Special Enrollment Period.


In addition to Medicare options to consider, if your spouse or partner continues to work, they may be able to cover you through their health plan. Talk to your HR department to help you evaluate all your options, costs, and any restrictions. The rules of Medicare are complicated, so to get started, consider the following questions:

  • Which plan offers you the best coverage for your health needs?
  • Your employer is required to offer you coverage, but is that your best option?
  • Is it more expensive to stay in your employer plan or join Medicare?
  • Can your spouse or partner remain in your employer's plan if you decide to leave?


Tip: Remember, one of the key goals at this stage is to avoid any gap in coverage.


Health care in retirement: Costs can come later


As you plan for health care expenses throughout your retirement—however long it may be—understand how paying for future health care expenses fits into your overall retirement income planning efforts, because health care utilization tends to increase as we age.


According to the Kaiser Family Foundation, the percentage of household budgets spent on health expenses is nearly 3 times as much for retirees on Medicare as for working households (14% versus 5%).6


"Although health care costs continue to rise, there are financial planning steps that you can take today to help prevent health care costs from eating into your retirement lifestyle," Feinschreiber advises. "For example, if you're age 50 or older, you may be able to make up for a savings shortfall with additional catch-up contributions to your 401(k) or IRA. In addition, if you are age 55 or older, you can make an additional $1,000 catch-up contribution annually to your health savings account."




IRS says companies are responsible for deferred payroll taxes

By Laura Davison and Allyson Versprille


The Internal Revenue Service said companies will be responsible for collecting and paying back any deferred payroll taxes under a directive by President Donald Trump aimed at helping workers while the administration and Democrats are stalemated on a stimulus deal.


The agency issued guidance Friday that implements Trump’s order to delay the due date for payroll taxes for millions of workers from Sept. 1 through year-end. Come next year, the taxes will need to be paid by April 30, however — unless Congress votes to forgive the liabilities, the release showed.


If lawmakers don’t step up, the guidance says employers must withhold the taxes from employees from Jan. 1 through April 30, meaning that workers will have double the deduction taken from their paychecks next year to pay back the deferred portion.


Employers “may make arrangements to otherwise collect the total applicable taxes from the employee,” if necessary, the release said.


The guidance puts the responsibility on employers for ultimately paying back the levies, and that could cause many to decline putting the extra money in workers’ paychecks — blunting any potential economic or political boost Trump had hoped to reap.


Executive limits

The complications showcase the limits to unilateral action by the executive branch. Processing challenges have hobbled a separate move by Trump to extend, for a time, half of the $600 a week supplemental insurance benefits that expired in July.


Among the issues with Friday’s guidance: what employers should do if employees quit before the end of the year, said Adam Markowitz, an enrolled agent and vice president at Howard L Markowitz PA CPA.


The guidance “gives me zero reason to tell my employers that they are protected for this,” he said.


Treasury Secretary Steven Mnuchin has said he “can’t force” companies to stop withholding the payroll levies, but that he hopes many companies will participate. The U.S. Chamber of Commerce has said many won’t implement the deferral, because of difficulties administering it and the greater burden for employees next year.


“The chamber remains concerned that it leaves some critical questions unanswered,” Caroline Harris, the group’s chief tax policy counsel, said in a statement. “As a result, uncertainties persist that make implementation a continuing challenge.”


Companies could potentially recoup the remaining taxes owed by withholding them all from employees’ final paycheck, said Adam B. Cohen, a partner at the law firm Eversheds Sutherland, but the guidance doesn’t explicitly say if that’s permitted.


The guidance also contains problems for employees if their employers choose to participate: They’ll have smaller paychecks next year when they have payroll taxes taken out of their paychecks twice.


Employees would see lower-than usual income from January to April, said Kyle Pomerleau, a resident fellow at the American Enterprise Institute, adding: “Individuals may not be ready or expecting a drop.”


There’s little time to decide whether to go ahead and reprogram payroll systems to accommodate the changes, with Sept. 1 looming fast.


To get the deferral, workers must earn less than $4,000 every two weeks, which amounts to about $104,000 per year. An individual earning $50,000 will owe about $1,073 in deferred taxes next year. Someone earning $104,000 — the maximum income to which the deferral applies — will owe $2,232.




After Man Shoots Fiancee’s Parents, Bloody Footprints Lead To Tax Charges

By Kelly Phillips Erb


On September 23, 2018, police in York County, Pennsylvania, responded to reports of a shooting. When they arrived, they learned that a couple had been shot: Kimberly Forney was struck in her lower leg, and Matthew Forney had been hit twice in his upper chest. The culprit? The couple’s son-in-law, Robert Hedrick.


Hedrick told police that he had been discussing his relationship with Morgan Forney, the couple’s daughter, when the argument turned physical. When Kimberly and Morgan attempted to intervene, a struggle ensued. At that point, Hedrick took possession of Kimberly’s handgun and fired several times, resulting in the injuries to Kimberly and Matthew. Yes, he shot his in-laws. Both of them.


Assault Charges Dropped

Hedrick was initially charged with two felony counts of aggravated assault and other charges. But in 2019, prosecutors dropped the charges. Hedrik’s attorney, Chuck Hobbs, told a local news outlet that's likely because of a defense motion to suppress statements Hedrick made to police after the shooting: Hobbs says that Lower Windsor Township Police didn't advise Hedrick of his Miranda rights before questioning him. Adding to the difficulty in prosecuting the case, Matthew Forney claimed that he couldn't remember what happened. So, Hedrick didn’t have to face a trial.

That feels like, on its own, enough for a Lifetime TV movie. But it gets more bizarre.


Tax Charges

According to United States Attorney David J. Freed, while securing the residence after the shooting, police officers observed bloody footprints leading through the house to an outside pool house. So off they went to investigate. Inside the pool house, they found a garbage bag which contained a large amount of bundled United States currency. The police obtained and executed a search warrant, finding additional amounts of bundled cash attached to daily receipts inside a large gun safe located in the residence. The officers then seized the cash and receipts. 


The investigation ended up with the Internal Revenue Service – Criminal Investigation (IRS-CI). IRS-CI determined that the cash - $817,713 - was actually income that the Forneys earned through their business, but did not report on their federal income tax returns for the years 2014 through 2017. The Forneys reported checks and credit card sales as taxable income on their tax returns, but held onto the cash without reporting it to the tax authorities. The unreported income for these years totaled $817,713, resulting in $292,066 in unpaid taxes.   


Guilty Pleas

Last month, Matthew Forney pleaded guilty to four counts of tax evasion, and Kim Forney pleaded guilty to four counts of aiding in the preparation of false tax returns.


According to court documents, Matthew Forney faces a maximum possible sentence for all charges of 20 years in prison and fines totaling $1,000,000, three years of supervised release, the costs of prosecution, denial of certain federal benefits and an assessment totaling $400. A pre-sentence conference is set for December 15, 2020.


According to the York Dispatch, as of last year, Hedrick was still living with Morgan Forney at her mother’s home (yes, that’s Kimberly Forney). Kimberly and Matthew, however, are no longer together.



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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