Important Action Required

Important Information:

RE: CORPORATE TRANSPARENCY ACT — BENEFICIAL OWNERSHIP INFORMATION REPORTING REQUIREMENT

Starting January 1, 2024, a significant number of businesses will be required to comply with the Corporate Transparency Act (“CTA). The CTA was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA requires the disclosure of the beneficial ownership information (otherwise known as “BOI”) of certain entities from people who own or control a company.

It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The intent of the BOI reporting requirement is to help US law enforcement combat money laundering, the financing of terrorism and other illicit activity.

The CTA is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury.

Below is some preliminary information for you to consider as you approach the implementation period for this new reporting requirement. This information is meant to be general-only and should not be applied to your specific facts and circumstances without consultation with competent legal counsel.

What entities are required to comply with the CTA’s BOI reporting requirement?

Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs) or any similar entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Domestic entities that are not created by the filing of a document with a secretary of state or similar office are not required to report under the CTA.

Foreign companies required to report under the CTA include corporations, LLCs or any similar entity that is formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office.

ARE THERE ANY EXEMPTIONS FROM THE FILING REQUIREMENTS?

There are 23 categories of exemptions. Included in the exemptions list are publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities and certain inactive entities, among others. Please note these are not blanket exemptions and many of these entities are already heavily regulated by the government and thus already disclose their BOI to a government authority.

In addition, certain “large operating entities” are exempt from filing. To qualify for this exemption, the company must:

a)    Employ more than 20 people in the U.S.;

b)    Have reported gross revenue (or sales) of over $5M on the prior year’s tax return; and

c)     Be physically present in the U.S.

WHO IS A BENEFICIAL OWNER?

• Any individual who, directly or indirectly, either:

• Exercises “substantial control” over a reporting company, or

• Owns or controls at least 25 percent of the ownership interests of a reporting company
  

An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.

The detailed CTA regulations define the terms "substantial control" and "ownership interest" further.

WHEN MUST COMPANIES FILE?

There are different filing timeframes depending on when an entity is registered/formed or if there is a change to the beneficial owner’s information.

 - New entities (created/registered in 2024) — must file within 90 days

·       New entities (created/registered after 12/31/2024) — must file within 30 days

·       Existing entities (created/registered before 1/1/24) — must file by 1/1/25

·       Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports — must file within 30 days

WHAT SORT OF INFORMATION IS REQUIRED TO BE REPORTED?

Companies must report the following information: full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).

Additionally, information on the beneficial owners of the entity and for newly created entities, the company applicants of the entity is required. This information includes — name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.

RISK OF NON-COMPLIANCE

Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time. For more information about the CTA, visit www.aicpa-cima.com/boi.

 YOU CAN FILE ONLINE

HERE

Please contact our office with any questions or concerns.

Taxation of Capital Gains

Let’s discuss the taxation of capital gains, in light of the election and the post-2025 expiration of many provisions in the 2017 Tax Cuts and Jobs Act.

Long-term capital gains get favorable rates. Profits from the sale or exchange of capital assets held for over a year are generally taxed at 0%, 15% or 20%. The rates are based on income thresholds adjusted annually for inflation. For 2024, the 0% rate applies to taxpayers with taxable income up to $47,025 on single returns, $63,000 for head-of-household filers and $94,050 on joint returns. The 20% rate begins at $518,901 for singles, $551,351 for household heads and $583,751 for joint filers. The 15% rate is for filers with taxable incomes between the 0% and 20% break points. Before 2018, long-term capital gains rates were based on your tax bracket. The 0% rate applied to people in the 10% or 15% income tax brackets, the 20% rate hit filers in the 39.6% top bracket, and the 15% rate was for filers in the other brackets. The pre-2018 rules are slated to return after 2025, unless Congress acts.

Kamala Harris proposes to hike the top long-term capital gains rate to 28%. Her proposal would apply only to the extent that a taxpayer’s taxable income exceeds $1 million. For example, a couple reports $1,400,000 in taxable income on their joint return, $500,000 of which is long-term capital gain. $400,000 of the capital gain would be taxed at 28%, and $100,000 would be taxed at 20%. And she may adopt Joe Biden’s idea to tax unrealized capital gains at death. This proposal would treat death as a realization event for income tax purposes… a deemed taxable sale at fair market value, with capital gains and losses reported on the decedent’s final income tax return…with a $5 million lifetime gain exclusion.

Donald Trump wants to make the tax cuts in his 2017 law permanent and take it further with even lower federal income tax rates for individuals. But what else does Trump propose to do with long-term capital gains? He hasn’t said, but Project 2025 might provide some insights into this. This policy blueprint, which was designed for the next Republican administration and spearheaded by the Heritage Fdn., suggests two changes to the capital gains tax.

First, Project 2025 calls for a 15% top long-term capital gains tax rate. It also supports the idea of indexing capital gains for inflation each year. Essentially, if this concept was enacted, taxpayers could increase their tax basis in capital assets by the rate of inflation between the purchase date and time of sale. Say you bought stock in early 2010 for $10,000 and sold it in Jan. 2024 for $35,000. Absent indexing, you’d have a $25,000 long-term capital gain ($35,0000–$10,000). With indexing, using the Chained CPI-U inflation measure, your basis would jump to $13,740, making your gain $21,260 ($35,000–$13,740), thus lowering your tax bill. This idea may sound simple, but it’s not. There are lots of complexities involved. Trump was all over the map on capital gains indexing during his presidency. He first touted the idea and then nixed it. We don’t know where he stands on it now.

PLEASE NOTE; This information is intended to inform and educate not to support or promote any political party.

Question and Answer

With Election Day about a month away… Readers are peppering us with questions on Donald Trump’s and Kamala Harris’s tax plans.

Question #1

“I’m in the midst of starting a small business. Will Harris’s proposal for start-ups help me?”

Answer

It could. Expenses in the start-up phase of a business aren’t currently deductible right away. Firms can elect to write off up to $5,000 of such costs in the first year they actively engage in business, with the rest amortized over 180 months. The $5,000 phases out dollar for dollar once total costs top $50,000. In our Aug. 29 Letter, we mistakenly said the first-year deduction is $10,000. Harris wants to increase the first-year start-up deduction to $50,000. She also calls for a simplified standard deduction for small firms, in lieu of deducting specific expenditures. No specifics yet on the amount. Harris’s proposals aren’t new. While running for president in 2016, Hillary Clinton wanted to raise the deduction for start-up costs to $40,000, and she backed a standard deduction for small businesses to take on their returns.

Question #2

“Where do Trump and Harris stand on the $10,000 SALT deduction cap? “

Answer

Taxpayers who itemize on Schedule A can deduct state and local taxes that they pay, up to a $10,000 cap. After 2025, unless Congress acts, itemizers would again be able to fully write off state and local taxes, as they generally could prior to 2018. Trump has floated axing the cap, but we don’t know how serious this idea is, given that the $10,000 limit was enacted in his late-2017 Tax Cuts and Jobs Act. His economic policy advisers stridently oppose any increase to the $10,000 figure and are instead urging him to lower the cap or eliminate the SALT deduction altogether. Trump recently vowed on social media and at a rally to restore the SALT write-off, saying people in N.J., N.Y., Pa. and other high-tax states would save lots in taxes. Harris has stayed silent so far. But it’s likely that if she’s elected president, she will get lots of pressure from congressional Democrats from high-tax states, who are clamoring for full deductibility of SALT or, alternatively, a higher cap. Here are two points to consider: Eliminating the $10,000 SALT write-off cap would disproportionately benefit upper-incomers. It would also cost the government a lot of money that the future president and Congress could use for other tax cuts.

Question #3

“Does Harris want to limit the gain deferral from like-kind exchanges of realty? “

Answer

It’s possible. When real property used in a business or held for investment is exchanged for like-kind real property, the gain that would otherwise be triggered if the realty were sold can be deferred. Harris wants to cut what she and many Dems see as tax loopholes for businesses and the wealthy. The deferral for like-kind swaps could very well be on that list. Curbing it was included in the 2025 budget proposals for President Biden’s administration. That proposal would cap the amount of deferred gain each year at $500,000 for each taxpayer…$1 million for joint filers. Gains over the $500,000 and $1 million caps would then be immediately taxed.

PLEASE NOTE; This information is intended to inform and educate not to support or promote any political party.

Estate Tax Update

What’s going to happen with the estate tax? Now, the federal lifetime estate and gift tax exemption is $13,610,000, and the highest estate tax rate is 40%. However, after 2025, the $13,610,000 figure will drop, reverting to the 2017 amount, adjusted for inflation… $7 million or so…unless Congress chooses to act.

We don’t know what lawmakers will do. But let’s look at some options out there.

1. The first one is keeping things as they are, meaning extending the current estate tax exemption and maintaining the top 40% tax rate. Donald Trump often says he wants to make permanent the tax cuts in the 2017 law, and we believe that promise would also include the higher lifetime estate and gift tax exemption. Whether Trump wants other additional easings to the estate tax remains to be seen.

2. The second is lowering the tax rate and/or raising the exemption amount. The authors of Project 2025, the blueprint spearheaded by the Heritage Foundation and designed for the next GOP administration, sets forth a federal estate tax rate of no higher than 20% and would make permanent the current estate tax exemption, adjusted for inflation. Some Republican lawmakers want a higher exemption amount.

3. Third is getting rid of the estate tax. A bill that draws strong GOP support in the House and the Senate, the Death Tax Repeal Act, calls for the repeal of the estate tax and the generation-skipping transfer tax. This is not a new idea.

4. Fourth is coming up with a middle-ground estate tax exemption figure, somewhere between the current $13,610,000 and the $7 million amounts.

5. Fifth is doing nothing. This would cause the higher estate tax exemption in the 2017 tax law to automatically lapse, reverting to about $7 million for 2026 deaths. The 40% top estate tax rate would remain in place, as it wasn’t changed in the 2017 law.

6. Sixth is lowering the exemption below 2017’s figure and/or hiking the tax rate. An example is the American Housing and Economic Mobility Act of 2024, a bill introduced in the Senate by Elizabeth Warren (D-MA) and in the House by Emanuel Cleaver (D-MO). The bill sets forth a slew of affordable housing proposals. It also calls for changes to estate and gift taxes to offset the cost of the provisions.

Among the key proposed estate and gift tax changes: Lower the exemption to $3.5 million, an amount last seen in 2009. Replace the current 40% estate tax rate with a series of progressive rates, ranging from 55% for estates over $3.5 million to 75% for estates of billionaires. Reduce the annual gift tax exclusion to $10,000 per donee.

Some online stories say that Kamala Harris endorses the bill’s estate tax plan. But we’ve found no concrete evidence of this. So far, Harris has been mum on the campaign trail when it comes to estate taxes. President Joe Biden in 2020 might have supported a $3.5 million exemption, but he apparently changed course.

PLEASE NOTE; This information is intended to inform and educate not to support or promote any political party.

Election Day

Election Day is a couple of months away… And taxes are on the ballot. Many provisions in the 2017 tax law are slated to expire after 2025. Donald Trump wants the 2017 law made permanent.

Kamala Harris is sticking with this pledge: No tax hikes if you make less than $400,000. We take this to mean that she would give her support to extending the tax breaks in the 2017 law to people earning less than $400,000, which are most taxpayers. Let’s look at other tax ideas Harris supports. Some are new, while others are retreads.

High-income individuals would pay more in taxes, if Harris gets her way. She’d bring back the top 39.6% income tax rate for people making $400,000 or more and hike the 3.8% net investment income surtax to 5% for these taxpayers.

The wealthy would pay more capital gains tax. Long-term capital gains tax would be imposed at ordinary tax rates up to 39.6% (44.6% with 5% NII tax added in) for taxpayers with taxable incomes over $1 million…$500,000 for separate filers.

Similar to Biden, she may want to tax unrealized gains upon death. This proposal would treat death as a realization event for income tax purposes… a deemed taxable sale at fair market value, with capital gains and losses reported on the decedent’s final income tax return…with a $5 million lifetime gain exclusion. And she might back a 25% minimum income tax on the ultrarich… people with at least $100 million in wealth. The tax would apply to taxable income plus unrealized capital gains, meaning the gain on appreciated assets not yet sold or disposed of. If this provision is ever adopted, expect opponents to quickly sue. Some Supreme Court justices don’t look favorably on taxing unrealized gains.

Families, first-time home buyers, tipped workers and others would get breaks. She’d bring back the 2021 expansions to the child credit…hiking the amount from $2,000 per child to $3,600, with monthly payments and full refundability. And she’d make it even bigger, by giving taxpayers a one-time child credit of $6,000, to be claimed on the parent’s tax return for the first year of the child’s life.

Among other proposals: Give first-time home buyers a credit of up to $10,000. Extend the expansions to Obamacare subsidies, allowing more people to get credits for buying health insurance through the marketplace. Plus make tipped income tax-free. There’s radio silence on what she’d do with the state and local tax deduction that itemizers claim on Schedule A. Some Capitol Hill lawmakers from high-tax states are pressuring leadership to get rid of the current $10,000 cap on SALT write-offs.

On business taxes, Harris wants to raise the 21% corporate tax rate to 28%. She would increase the 15% alternative minimum tax on very big corporations to 21%. She’d do away with what she and many Democratic lawmakers see as tax loopholes, while keeping the green-energy tax subsidies enacted in the Inflation Reduction Act. She’d quadruple the 1% excise tax on stock buybacks by publicly held firms. And she has proposed a new credit for home builders who build starter homes.

Lazy Days of August

Though it’s still the lazy days of August… the U.S. celebrated National Lazy Day on Aug. 10… Readers continue to ask us tax questions. One topic that pops up from time to time: Federal taxation of Social Security benefits. So we thought we would review the rules.

Some people aren’t taxed on their benefits. They include individuals for whom Social Security is the sole or primary source of gross income. Many others unfortunately could owe tax at ordinary income tax rates on up to 50% or 85% of Social Security benefits, depending on the amount of their provisional income. Provisional income is generally equal to the combined total of (1) tax-exempt interest, (2) 50% of your Social Security benefits and (3) other non-Social-Security income items that make up your adjusted gross income, minus certain deductions and exclusions.

For single filers: If provisional income is less than $25,000, then the benefits are tax-free. If provisional income is between $25,000 and $34,000, then up to 50% of benefits is taxable. If provisional income is over $34,000, up to 85% is taxed. For joint filers: If provisional income is less than $32,000, then the benefits are tax-free. If provisional income is between $32,000 and $44,000, then up to half of benefits is taxable. If provisional income is over $44,000, up to 85% is taxed. If you want federal income tax withheld, complete IRS Form W-4V to have 7%, 10%, 12% or 22% of your monthly Social Security benefits taken out.

Many tax breaks and income levels are indexed to inflation each year… But not the provisional income thresholds for taxing Social Security benefits. For decades, they have stayed static at $25,0000, $34,000, $32,000 and $44,000. Democrats have proposed bills over the years to raise the thresholds… But they never pass. That’s because the bills also include payroll tax hikes on upper-incomers. For example, in 2022 Dems proposed to increase the $25,000 and $32,000 income thresholds to $35,000 and $50,000. However, that same bill also had the 6.2% Social Security tax for employees and employers kick in again for high-income workers on wages over $400,000. For 2024, up to $168,600 of wages are hit with the 6.2% Social Security tax. The proposed payroll tax hike on upper-income individuals made the bill a nonstarter with Republicans.

Donald Trump wants to end federal taxation of Social Security benefits. On July 31, he posted on Truth Social, his social media platform, that “seniors should not pay tax on Social Security.” He didn’t elaborate on how he would do this.

Most states exempt Social Security benefits from state income tax. But not all. The outliers that tax all or part of the benefits are Colo., Conn., Minn., Mont., N.M., R.I., Utah and Vt. Most of these have exemptions based on income guidelines.

Tax Breaks

If you earn income from rental properties…

You may be eligible to claim a nice tax break: The 20% qualified business income deduction. The QBI deduction is for self-employed individuals and owners of pass-through entities, such as LLCs, partnerships and S corporations. These individuals can deduct 20% of their QBI. The write-off also applies to some landlords with Schedule E rental income. There are lots of special rules and restrictions, most of which apply to people with taxable incomes before the QBI deduction of more than $383,900 on joint returns and $191,950 for all other returns. The QBI write-off is temporary. It ends after 2025, unless Congress extends it.

There are two ways to qualify for the 20% QBI write-off for rental income.

The first is if the rental activity rises to the level of a trade or business. For this purpose, IRS regulations refer to the standard under tax code Section 162, the statute that generally governs the deductibility of trade or business expenses. There is no statutory or regulatory definition of a Section 162 trade or business. Instead, this determination is based on a taxpayer’s specific facts and circumstances. Some relevant factors are the type of property (commercial or residential), lease terms, extent of day-to-day involvement by the lessor or his or her agents, the significance and type of ancillary services provided under the lease, and the number of rentals. Here are some best practices to treat your rental as a business: Keep expense receipts. Insure the realty. Keep separate bank accounts. And track time and services performed.

A second way to qualify rental income as QBI is to meet an IRS safe harbor. At least 250 hours must be devoted to the rental activity by the taxpayer, employees or independent contractors in a year. Time spent on tenant services, repairs, property management, advertising, collecting rents, negotiating leases and supervising workers counts. Hours put in for driving to and from the property, arranging financing and constructing long-term capital improvements aren’t included. If you own multiple rental properties, you can treat each property separately or aggregate similar rental activities into commercial or residential categories.

Those who use the safe harbor must meet strict recordkeeping requirements and attach an annual statement to their returns, as detailed in Rev. Proc. 2019-38. Contemporaneous records must detail hours, dates and descriptions of the services and who performed them. If the services are done by contractors or employees, the taxpayers must keep logs of the work done by them, as well as proof of payment. The safe harbor doesn’t apply to property leased under a triple net lease or if the owner’s personal use exceeds the greater of 14 days or 10% of the days rented.

Treating rental income as QBI doesn’t change how you report that income. Real estate rental income is usually reported on Schedule E of the 1040. Also, the rental income generally isn’t subject to self-employment tax. If you qualify, you’d take the QBI write-off on Form 1040, line 13 and attach Form 8995 or 8995-A.

Home Buying, Selling, and Taxes

Spring is a popular time for selling a home. Knowing how to calculate tax basis is vital. It can help reduce your gain when you sell. And learning the rules even before you buy a home will make the process of figuring taxes much easier when you do decide to eventually sell your place.

Lots of home sale profit isn’t even taxed. That’s because of the home sale exclusion. If you have owned and lived in your primary home for at least two out of the five years before the sale date, up to $250,000 of the gain…$500,000 for joint filers… is tax-free. Gain in excess of these amounts is taxed at long-term capital gains rates.

Many homeowners won’t crack the $250,000/$500,000 gain exclusion limits. But those living in pricey areas or who’ve owned their homes a long time may. If you’re in this boat, you should know what counts toward your home basis so you don’t pay more tax than necessary. In calculating gain or loss from a home sale, start with the selling price and subtract selling expenses and the adjusted tax basis of the home. As you can see, the higher the tax basis, the lower the gain from the sale.

Figuring tax basis starts out easy. Begin with what you paid for the home, including the mortgage if you financed the purchase, and add in certain settlement fees. Tracking these costs is simple if you kept your settlement sheet from the purchase.

Your home’s tax basis doesn’t stay static over the years that you own it. Here are common adjustments to tax basis: Additions and improvements. The cost of additions made to your home and improvements that add to its value, prolong its useful life, or adapt it to new uses will increase your home’s basis. Examples of big-ticket items include adding a room, installing new air-conditioning, renovating a kitchen, finishing a basement, or putting in new landscaping or a pool. Smaller-ticket capital improvements also hike basis. These include new doors and windows, duct and furnace work, built-in appliances, water heaters and more. Repairs, maintenance and improvements that are necessary to keep your residence in good condition but don’t add value or prolong its life generally don’t hike tax basis.

Eco-friendly upgrades: If you are putting in energy-saving improvements that qualify for tax credits or subsidies, you must first reduce the cost of the system by the tax credit or subsidy that you received before increasing your home’s tax basis.

Prior depreciation write-offs. You must reduce the tax basis in your home by any depreciation deductions you were eligible for if you used a room or other space exclusively or regularly for business or if you rented out your home in the past.

Homeowners who keep good records will find it easier to calculate tax basis. It’s best to keep all your major home improvement receipts and invoices in one folder. If you didn’t keep these records, estimate the costs by looking at old bank statements, or call the company that originally did the remodeling or put in the upgrade.

We hope this helps.

Tax Questions Answered

Clients are interested in taxes this spring…

Judging by the number of your questions. Here are some popular questions with answers.

My employer offers a pet insurance benefit. Can I pay for this with pretax wages?

No. Unlike employer-paid health insurance for workers, which isn’t included in taxable wages, the value of employer-paid pet insurance is taxable income. Most employers who offer pet insurance benefits don’t subsidize the cost, and employees who opt in pay their share through post-tax payroll deductions.

Can I use 529 funds to pay for a college student’s studies abroad?

In many cases, yes. A 529 plan can be used for any college that participates in the U.S. federal student aid program. If a student is enrolled in a U.S. college and chooses to study abroad through the school’s program for a semester or two, the study-abroad program will be 529-eligible, provided the U.S. college is eligible and the college accepts the study-abroad credits. If the child decides to enroll in a non-U.S. college for their full college education, then that foreign university must participate in the U.S. federal student aid program. And, believe it or not, many foreign colleges do participate and would therefore qualify as eligible schools for 529 purposes. Tuition, books, fees, and room and board can be paid with 529 funds.

I own a residential rental property and put a new roof on it last month. Can I fully deduct the cost of the roof on Schedule E of my 2024 Form 1040?

No, but you can depreciate it over 27.5 years. The new roof you installed is treated as an improvement to the rental property and is treated separately from the underlying property for depreciation purposes. This means the roof’s cost is depreciated over 27.5 years, the same as residential rental property. The beginning depreciation year would be 2024, the year you put on the new roof.

I am planning to take out a reverse mortgage on my primary residence. Will I owe federal income tax on the money I receive in the transaction?

No. The payments you get from a reverse mortgage are treated as nontaxable loan proceeds. Note that if you itemize, you cannot deduct on Schedule A of the 1040 the interest you eventually pay. That’s because you are not using the reverse mortgage proceeds to buy, build or substantially improve the home that is securing the mortgage.

My business just received the employee retention tax credit for 2021 wages. Must my firm amend its 2021 income tax return to reflect the ERTC refund?

Yes, if your business previously deducted the wages on that return. The ERTC reduces the wages-paid deduction on the employer’s income tax return. Since your firm got the ERTC after filing its 2021 return, it must amend that return to reduce the wages deduction by the ERTC received. You can’t treat the ERTC refund as income in 2024, the year you received it. Note that examiners at the Service are looking at this issue very closely because it’s a common ERTC compliance error.

Times Up

Big tax changes are likely coming in 2026. The culprit is the 2017 tax reform law. Most individual tax provisions were temporary. They expire after 2025. Unless extended by Congress, the provisions will revert automatically on Jan. 1, 2026, to the rules in effect for 2017.

We will look at key expiring provisions.

Tax brackets. The individual income tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% will return to 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, with different income-level break points than now.

Bigger standard deductions. The 2017 law more than doubled these breaks.

Higher child credits. Prior to 2018, it was $1,000. Now, it’s $2,000. Plus the $500 credit for each dependent who is not a qualifying child. Alternative minimum tax. The higher exemption amounts and phaseout zones after 2017 have resulted in far fewer individual taxpayers having to pay the AMT.

The 20% qualified business income deduction for self-employeds and people who own interests in S corps, partnerships, LLCs and other pass-through entities.

The adjusted-gross-income limitation on cash donations to qualified charities was increased from 50% to 60% under the 2017 tax legislation, helping big donors.

The larger lifetime estate and gift tax exemption. People who die this year have a $13,610,000 exemption. Compare this with $5,490,000 for 2017 deaths.

The cutback on high itemizations for upper-income taxpayers would return.

Restrictions on popular deductions also end after 2025. Among them:

Personal exemptions. In 2017, filers could take a deduction of $4,050 for themselves and each of their dependents. For example, a family of three claimed a $12,150 personal exemption deduction. The 2017 law eliminated this. The $10,000 cap on deducting state and local taxes on Schedule A of the 1040. This would be welcome relief for folks paying high property tax and/or state income tax. The curbs on deducting home mortgage interest. Under the 2017 law, interest can be deducted on up to $750,000 of home acquisition debt…down from $1 million.

Miscellaneous deductions on Schedule A subject to the 2%-of-AGI threshold. The 2017 law eliminated this category of itemized deductions through 2025. This includes unreimbursed employee expenses (travel, meals, education, etc.), brokerage and IRA fees, hobby expenses, and tax return preparation fees.

Theft and casualty losses. Under current law, only casualty losses arising in a federally declared disaster area can be deducted on Schedule A.

Job-related moving expenses. Now, only members of the military get the break.

2025 is also the last year for two tax breaks not in the 2017 law:

The expansion of the Obamacare health premium credit to more individuals who buy insurance through a marketplace.

And most student loan debt forgiven from 2021 through 2025 is exempt from federal income tax, which is an exception to the general rule that income from the cancellation of indebtedness is taxable.

To Itemize or Not

As you’re filling out your 2023 Form 1040…

You may ask whether you should itemize on Schedule A or take the standard deduction. Most filers take the standard deduction because it’s higher than their total itemizations. But not all. Take people with big medical bills. Itemizers can claim medical expenses not reimbursed by insurance, for themselves, spouse and dependents. The cost must be incurred primarily to alleviate or prevent a physical or mental disability or illness. But there is a floor. Medical expenses are deductible only to the extent the total exceeds 7.5% of your AGI.

The list of eligible medical expenses is broader than most people think.

It includes the basics, such as out-of-pocket payments to doctors, dentists, optometrists and other medical professionals; mental health services; hospital stays; health insurance and Medicare premiums; prescription drugs; glasses and hearing aids. Amounts paid for in vitro fertilization qualify as medical expenses. Ditto for medical driving. The 2023 standard mileage rate is 22¢ per mile.

The cost of treatment for drug use or alcoholism is a medical expense.

Among other health and wellness costs that qualify as deductible medicals: A smoking cessation program. Nutritional counseling for a doctor-diagnosed disease. A weight-loss program and certain special food to help with the treatment of obesity, hypertension, heart disease or other physical illness diagnosed by a physician. But most food, weight loss supplements or low-calorie beverages aren’t eligible. Neither is a weight-reduction program or cosmetic surgery to improve your appearance, or gym membership fees. Teeth whitening and hair transplants don’t count either. A bipartisan group of federal lawmakers want to expand the deduction to include up to $1,000 of the cost ($2,000 for spouses) of gyms and other fitness activities.

If you, your spouse or your dependent requires long-term care…

You may be able to deduct the unreimbursed costs as medical expenses. Long-term-care expenses include the costs of assisted living, in-home care and nursing home services. The long-term care must be medically necessary for one who is chronically ill. The costs of meals and lodging at an assisted living facility or a nursing home count as medical expenses for people mainly there for medical care. Premiums you pay for a long-term-care policy are deductible medicals, too. But the deduction is capped based on age. The older you are, the greater the write-off.

Also eligible:

Certain home improvements to adapt to a disability or illness. For instance, ramps, wide doorways or entrances, railings and wheelchair lifts. Plus veterinary costs and food for a service dog to aid people with disabilities. The cost of the dog also qualifies. An emotional support animal counts if needed primarily for the owner’s medical care to alleviate a mental disability or illness. For more details on these and other medicals, see IRS Publication 502.

Tax Changes Part 4

First-year bonus depreciation isn’t as valuable in 2024.

Last year, businesses could deduct 80% of the cost of new and used qualifying business assets with lives of 20 years or less. This year, the 80% write-off decreases to 60%. But expensing is higher. $1,220,000 of assets can be expensed in 2024. This limit phases out dollar for dollar once more than $3,050,000 of assets are put into use in 2024. Note that the amount of business assets expensed can’t exceed the business’s taxable income. Bonus depreciation doesn’t have this rule.

A key dollar threshold on the 20% deduction for pass-through income rises in 2024.

Self-employeds and owners of LLCs, S corporations and other pass-throughs can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes of more than $383,900 for joint filers and $191,950 for all others.

More companies can use the cash method of accounting.

For taxable years beginning in 2024, C corporations with average annual gross receipts of $30 million or less over the previous three years can use the cash method. This threshold also applies to partnerships and LLCs that have C corporations as owners.

The 2024 standard mileage rate for business driving is 67 cents per mile.

The mileage allowance for medical travel and military moves is 21 cents per mile in 2024. The charitable driving rate is fixed by law and stays put at 14 cents a mile

Certain clean-energy credits in the Inflation Reduction Act can be monetized.

Businesses may elect to transfer 11 of the credits to unrelated third parties for cash. State and local government and their instrumentalities and tax-exempt organizations can elect to treat 12 of the energy-savings credits as a payment of federal income tax and receive an income tax refund for the amount that exceeds any taxes they owe.

A new beneficial ownership reporting regime for small firms begins in 2024.

It’s run by the Financial Crimes Enforcement Network. Certain corporations, LLCs and other entities must report information about themselves and their beneficial owners to FinCEN. There are lots of exceptions to reporting, including one for operating firms with over 20 full-timers, over $5 million in gross receipts, and a U.S. physical office. Entities in existence before 2024 have until Dec. 31, 2024, to file their report. Entities formed after 2023 have 90 days after the date of formation to comply. Reporting will be done electronically through FinCEN’s website. Although this isn’t a tax rule, businesses and tax professionals should be aware of it.

As always, we’ll report on tax changes from IRS, Congress and the courts… and how you’ll be affected. And in an election year, we’ll delve further into the tax plans of the leading candidates for president. 2024 promises to be a very interesting year.

Tax Changes Part 2

PAYROLL TAXES

The Social Security annual wage base for 2024 is $168,600, an $8,400 hike. The Social Security tax rate on employers and employees remains 6.2%. Both pay the 1.45% Medicare tax on all compensation, with no cap. Individuals also pay an additional 0.9% Medicare surtax on wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn’t hit employers.

The nanny tax threshold is $2,700 for 2024, a $100 increase from 2023.

TAX BRACKETS

The income tax brackets for individuals are much wider for 2024 because of inflation during the 2023 fiscal year. Tax rates are unchanged.

STANDARD DEDUCTIONS

Standard deductions are higher for 2024. Married couples get $29,200, plus $1,550 for each spouse 65 or older. Singles can claim $14,600…$16,550 if age 65 or up. Heads of household get $21,900 plus $1,950 once they reach 65. Blind people receive $1,550 more ($1,950 if unmarried and not a surviving spouse).

CAPITAL GAINS

Tax rates on long-term capital gains and qualified dividends do not change.

But the income thresholds to qualify for the various rates go up for 2024. The 0% rate applies at taxable incomes up to $94,050 for joint filers, $63,000 for household heads and $47,025 for singles. The 20% rate starts at $583,751 for joint filers, $551,351 for household heads and $518,901 for single filers. The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

MINIMUM TAX

AMT exemptions rise for 2024 to $133,300 for couples and $85,700 for singles and household heads. The exemption phaseout zones start at $1,218,700 for couples and $609,350 for others. The 28% AMT rate kicks in above $232,600.

KIDDIE TAX

The kiddie tax has less bite in 2024. The first $1,300 of unearned income of a child under age 19…under age 24 if a full-time student…is tax-free. The next $1,300 is taxed at the child’s rate. Any excess is taxed at the parent’s rate.

Taxes and The Election

The tax stakes are high in next year’s election.

Much of the 2017 tax law expires after 2025. Former President Trump’s tax reform legislation slashed individual tax rates and estate taxes and permanently lowered tax rates on corporations. Most provisions impacting individuals and estates, such as the tax rates, higher standard deductions, higher child credit, the $10,000 SALT write-off cap, and larger lifetime estate and gift tax exemption, end after 2025. Unless lawmakers extend the changes, they will revert to the rules that were in effect for 2017.

The next president will have to deal with these expiring tax provisions.

President Biden wants to raise taxes on people with incomes over $400,000. It seems he would try to extend the tax rates in the 2017 law for other individuals. The leading Republican candidates have their own ideas, as shown here.

Start with Donald Trump.

He wants to make the 2017 tax law permanent and take it further, with even lower tax rates for individuals and businesses. For example, he has proposed lowering the 21% corporate tax rate, maybe to 15%. He also talks about imposing a 10% tariff on all imports coming into the U.S. And he’s mentioned paying a cash rebate or dividend to each American household.

Nikki Haley has lots of tax proposals on her agenda.

On individual taxes, she advocates lower tax rates for working families, repeal of the itemized deduction for state and local taxes, and making permanent the popular 20% write-off for qualified business income of self-employeds and owners of pass-through entities. She calls for ending the green-energy tax breaks in last year’s Inflation Reduction Act. And she supports getting rid of the long-standing 18.4¢-per-gallon federal gas tax.

Ron DeSantis has some interesting ideas.

In addition to his view that the 2017 tax law should be extended. For example, he favors tax abatements for businesses to incentivize the repatriation of capital from China. He doesn’t say what this exactly means, but some have referred to it as a repatriation tax holiday. He wants permanent 100% bonus depreciation. And he calls for abolishing the IRS.

Turn to Chris Christie.

Surprisingly, the former governor of N.J., a state with one of the highest real property taxes in the country, doesn’t advocate for an end to the $10,000 cap on deducting state and local taxes on Schedule A. He instead says he’s against repeal of the cap, although he may support a higher limit.

All the GOP candidates vow to extend or make permanent the 2017 tax law…

Except for Vivek Ramaswamy. He has stayed silent on this topic so far. He wants to reduce taxes, especially for the wealthy, and is opposed to an estate tax. In the past, he has favored a 12% flat tax, though it is unclear whether this refers to a 12% income tax or sales tax. And like DeSantis, he would eliminate the IRS.

The Skinny on HSA

As you ponder health insurance for 2024…

One option is a health savings account. HSAs are tax-advantaged arrangements used to manage deductibles and out-of-pocket costs and let you save for future health care expenses. Many employers have an HSA option. If your employer doesn’t offer it, check with your brokerage company or bank on whether you meet all the requirements to fund and keep an HSA for yourself or your family.

Some basics:

Eligibility for HSAs is restricted. You must have a high-deductible health plan to qualify. The minimum allowable deductible for 2023 is $3,000 for family coverage and $1,500 for self-only coverage. And out-of-pocket costs, including copayments, can’t exceed $15,000 a year for family coverage and $7,500 for individual coverage. For 2024, these amounts are $3,200, $1,600, $16,100 and $8,050, respectively.

Expenses for preventive care can be covered dollar-for-dollar by HDHPs, even if the deductible hasn’t been met. Alternatively, preventive medical costs can be covered by a lower deductible, depending on the terms of the policy. Some services and drugs for a range of chronic illnesses can be covered by HDHPs. Also, beginning in 2020, IRS allowed the costs of testing for and treating COVID-19 to be covered dollar-for-dollar by HDHPs, even if the deductible hasn’t been met, or a lower deductible may apply. This COVID easing applies through the end of 2024.

People eligible for Medicare can’t contribute to HSAs. If you have a balance in an existing HSA, once you turn 65, you can use that money on a tax-free basis to pay monthly Medicare Part B and D premiums. And you can take tax-free payouts from your HSA for your out-of-pocket medical costs, even if you are on Medicare.

HSAs have several major federal tax advantages that owners can enjoy.

Contributions are deductible or are from pretax wages. But there’s a limit. For 2023, the annual cap on deductible or pretax HSA contributions is $3,850 for self-only coverage and $7,750 for family coverage. For 2024, these amounts rise to $4,150 and $8,300. People who are 55 or older can put in an additional $1,000.

Earnings inside an HSA build up tax-free for the account owner. HSAs don’t have a use-it-or-lose-it rule, unlike flexible spending accounts. And any withdrawals that are used to pay medical expenses aren’t taxed. You needn’t take out the HSA funds in the same year you incur the medical cost. If you keep receipts, your HSA can reimburse you in a later year. Tax-free HSA funds can also be used to buy over-the-counter medicine and menstrual care products.

We’re following two House bills covering HSAs:

One would let people with subscription-based primary care become eligible to fund an HSA. Additionally, it would allow HSA eligibility for an individual whose spouse is enrolled in an FSA. This proposal was OK’d by the House Ways & Means Com. on a bipartisan basis. A second bill, with only Republican support, would provide a number of easings, the biggest being an increase in the amount of deductible HSA contributions.

Student Loan Repayment

It’s finally fall. Leaves are changing color.

Children and some adults are awaiting trick-or-treat and we are working hard filing tax returns for clients on extension. And student loan payments have resumed… Putting a dent in a lot of people’s wallets after a three-year halt on repaying college debt ended. But these tax breaks can help ease the pain.

There’s a deduction for student loan interest.

And taxpayers needn’t itemize to take this write-off. Up to $2,500 of interest paid each year can be claimed as a deduction on Schedule 1 of the Form 1040. For 2023, the break begins to phase out for single filers with modified adjusted gross incomes above $75,000…$155,000 for joint filers. It ends for taxpayers with modified AGIs over $90,000 and $185,000, respectively. Parents who help a child repay student loans generally can’t take the write-off unless they are also legally liable on the loans. But, even if a parent paid the loan, a child who meets the modified AGI limits can still take the interest deduction, provided he or she isn’t eligible to be claimed as a dependent on the parents’ return. IRS treats this as if the parents gifted money to the child, who then paid the debt.

Most student loan debt forgiven in 2021 through 2025 is tax-free for federal income tax purposes.

This relief, enacted in the March 2021 stimulus law, is an exception to the general rule that cancellation of indebtedness is taxable. IRS has instructed lenders and loan servicers to not issue Form 1099-C to borrowers whose student loans are forgiven during this time period, and the discharged debt is excluded from income. Some states have different rules, which can be confusing.

Up to $10,000 from 529 accounts can be used to help pay off college debt of the account beneficiary without having to pay income tax on the withdrawals. It’s important to note that this $10,000 is a lifetime limit, not an annual limit. 529 distributions for student loan repayments that exceed $10,000 are taxable in part to the extent of the excess and are also subject to a 10% penalty.

Employers that offer qualified educational assistance programs can help. These programs can be used to pay down up to $5,250 of an employee’s college loans each year through 2025. Payments are excluded from workers’ wages for tax purposes.

Starting in 2024, relief can be offered through workplace retirement plans.

A new law will allow employer 401(k) matches conditioned on student loan repayments made by employees. IRS blessed such a program in a 2018 private letter ruling. In that situation, the firm contributed to its 401(k) plan on behalf of employees paying down their college debt. The employer matches took place regardless of whether employees also paid in. Participation was voluntary, and employees had to elect to enroll in the program. Employers have been lobbying Congress for years to enact a statute to allow them to do this without seeking a private ruling from the Service, and lawmakers obliged them last year in the SECURE 2.0 law.

How long to keep tax returns and records?

How long to keep tax returns and records?

Great question. The answer depends on the type of document and the kinds of transactions you engage in. Keep your tax returns at least three years. That’s generally how long IRS has to question items on your return and to bill you for any additional tax. It’s also the timeframe to file an amended return to seek a refund. IRS can go back up to six years if your return omits more than 25% of income. If fraud is proved, there is no limit. State tax returns may have to be retained for a longer time period.

Don’t automatically throw out all returns and records after three years.

Look over old documents to see if you might need any parts of them in the future. Hold on to records that help establish the adjusted basis of real estate. Save your settlement sheet whenever you buy real property, including your home. And don’t throw away receipts or invoices for improvements made to the property. Taxpayers who keep good records will find it easier to calculate the adjusted basis of their real estate investments compared with people who don’t maintain records. If you have multiple real estate properties, it’s best to have separate folders for each.

Retain the files until at least three years after you dispose of the property.

Ditto for securities transactions. Be sure to keep your purchase documents for taxable mutual funds, stocks and the like. Among other records to maintain: Those showing stock splits, dividend reinvestments and nontaxable distributions. If you invest in bonds or Treasury bills or notes, track when these securities mature.

If you’ve made nondeductible payins to IRAs or post-tax payins to 401(k)s…

Save records until three years after the accounts are depleted. File Form 8606 with your return for the year you make a nondeductible IRA contribution. If you don’t, those contributions will be treated the same as deductible payins when withdrawn. Retain copies of Form 8606 and your 1040s for each year that such payins are made. Also hold on to Form 5498 or similar statements reflecting the amount of IRA payouts.

If you inherit property or receive property as a gift, heed this advice:

For inheritances, you’ll need to know date-of-death value. For gifts…the donor’s cost. So keep documentation of these figures until three years after you sell the asset.

Businesses….

Should hang on to payroll tax records for a minimum of four years after the due date for filing the Form 941 for the fourth quarter of a particular year. Among the information to be retained: Wage amounts, payment dates and employee data, such as names, employment dates and Social Security numbers. Periods for which workers were paid while absent because of sickness or injury. Copies of all W-4 forms and payroll returns, and amounts and dates of tax deposits. Plus records of tips earned by workers and fringe benefits provided to employees. Records on cost of assets, depreciation, etc., should be retained for decades.

IRS Enforcement

IRS’s efforts at combating individual tax identity theft are paying off…

Thanks in large part to antifraud measures IRS uses to filter out returns. For the 2023 filing season, the agency has been using 236 computer software filters to identify potential identity theft returns and prevent payment of fraudulent refunds. Compare this with 168 filters used for the 2022 filing season. As of March of this year, IRS computers flagged 1.1 million individual returns with refunds totaling $6.3 billion for additional review as a result of those identity theft filters. Not all those returns will be confirmed as fraudulent after verifying the filer’s identity, but some will.

The Service continues to fall behind on policing the tax rules on alimony.

Taxpayers who deduct alimony must include the recipient’s Social Security number and the original date of the divorce or separation agreement on Schedule 1 of the 1040. Treasury inspectors found that the agency isn’t reviewing cases with invalid SSNs. And IRS is allowing some alimony deductions on returns showing an agreement date after 2018. Remember, alimony paid under post-2018 divorce or separation agreements isn’t deductible, and ex-spouses aren’t taxed on alimony they get under these pacts. (Older divorce agreements can be modified to follow these rules if both parties agree.) IRS says it will update its internal guidance but won’t reject noncompliant returns.

Returns claiming improper dependent care credits also vex IRS.

This break, taken by families who are working or looking for a job, helps to offset some expenses of paying for the care of children under age 13 and qualifying relatives. Taxpayers use Form 2441 to calculate the credit and must report the provider’s tax ID number on the 2441. Treasury inspectors had previously recommended several ways that IRS could improve its filters to screen erroneous credits taken on 1040 returns. In response, the Service made some changes, but it hasn’t yet gone far enough. Returns with patently invalid care-provider tax ID numbers on the 2441 sneak through.