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HEATHER DOERING 11/14/24 HEATHER DOERING 11/14/24

How much can you contribute to your retirement plan in 2025? The IRS just revealed the answer

The IRS has issued its 2025 inflation-adjusted contribution amounts for retirement plans in Notice 2024-80. Many retirement-plan-related limits will increase for 2025 — but less than in prior years. Thus, depending on the type of plan you have, you may have limited opportunities to increase your retirement savings.

Type of limitation 2024 limit 2025 limit

Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $23,000 $23,500

Annual benefit limit for defined benefit plans $275,000 $280,000

Contributions to defined contribution plans $69,000 $70,000

Contributions to SIMPLEs $16,000 $16,500

Contributions to traditional and Roth IRAs $7,000 $7,000

Catch-up contributions to 401(k), 403(b) and 457 plans for those age 50 or older $7,500 $7,500

Catch-up contributions to 401(k), 403(b) and 457 plans for those age 60, 61, 62 or 63* N/A $11,250

Catch-up contributions to SIMPLE plans for those age 50 or older $3,500 $3,500

Catch-up contributions to SIMPLE plans for those age 60, 61, 62 or 63* N/A $5,250

Catch-up contributions to IRAs for those age 50 or older $1,000 $1,000

Compensation for benefit purposes for qualified plans and SEPs $345,000 $350,000

Minimum compensation for SEP coverage $750 $750

Highly compensated employee threshold $155,000 $160,000

* A change that takes effect in 2025 under SECURE 2.0

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2025:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:

For a spouse who participates, the 2025 phaseout range limits will increase by $3,000, to $126,000–$146,000.
For a spouse who doesn’t participate, the 2025 phaseout range limits will increase by $6,000, to $236,000–$246,000.

For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2025 phaseout range limits will increase by $2,000, to $79,000–$89,000.

Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $7,000 contribution limit for 2025 (plus $1,000 catch-up, if applicable, and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may also be beneficial if your MAGI is too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

For married taxpayers filing jointly, the 2025 phaseout range limits will increase by $6,000, to $236,000–$246,000.
For single and head-of-household taxpayers, the 2025 phaseout range limits will increase by $4,000, to $150,000–$165,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for traditional and Roth IRAs.)

Revisit your retirement plan

To better ensure that your retirement plans remain on track, consider these 2025 inflation-adjusted contribution limits. We can help you review your plans and make any necessary modifications.

HEATHER DOERING 11/4/24 HEATHER DOERING 11/4/24

Ease the financial pain of natural disasters with tax relief

Hurricane Milton has caused catastrophic damage to many parts of Florida. Less than two weeks earlier, Hurricane Helene victimized millions of people in multiple states across the southeastern portion of the country. The two devastating storms are among the many weather-related disasters this year. Indeed, natural disasters have led to significant losses for many taxpayers, from hurricanes, tornadoes and other severe storms to the wildfires again raging in the West.

If your family or business has been affected by a natural disaster, you may qualify for a casualty loss deduction and federal tax relief.

Understanding the casualty loss deduction

A casualty loss can result from the damage, destruction or loss of property due to any sudden, unexpected or unusual event. Examples include floods, hurricanes, tornadoes, fires, earthquakes and volcanic eruptions. Normal wear and tear or progressive deterioration of property doesn’t constitute a deductible casualty loss. For example, drought generally doesn’t qualify.

The availability of the tax deduction for casualty losses varies depending on whether the losses relate to personal- or business-use items. Generally, you can deduct casualty losses related to your home, household items and personal vehicles if they’re caused by a federally declared disaster. Under current law, that’s defined as a disaster in an area that the U.S. president declares eligible for federal assistance. Casualty losses related to business or income-producing property (for example, rental property) can be deducted regardless of whether they occur in a federally declared disaster area.

Casualty losses are deductible in the year of the loss, usually the year of the casualty event. If your loss stems from a federally declared disaster, you can opt to treat it as having occurred in the previous year. You may receive your refund more quickly if you amend the previous year’s return than if you wait until you file your return for the casualty year.

Factoring in reimbursements

If your casualty loss is covered by insurance, you must reduce the loss by the amount of any reimbursement or expected reimbursement. (You also must reduce the loss by any salvage value.)

Reimbursement also could lead to capital gains tax liability. When the amount you receive from insurance or other reimbursements (less any expense you incurred to obtain reimbursement, such as the cost of an appraisal) exceeds the cost or adjusted basis of the property, you have a capital gain. You’ll need to include that gain as income unless you’re eligible to postpone reporting the gain.

You may be able to postpone the reporting obligation if you purchase property that’s similar in service or use to the destroyed property within the specified replacement period. You can also postpone if you buy a controlling interest (at least 80%) in a corporation owning similar property or if you spend the reimbursement to restore the property.

Alternatively, you can offset casualty gains with casualty losses not attributable to a federally declared disaster. This is the only way you can deduct personal-use property casualty losses incurred in locations not declared disaster areas.

Calculating casualty loss

For personal-use property, or business-use or income-producing property that isn’t completely destroyed, your casualty loss is the lesser of:

The adjusted basis of the property immediately before the loss (generally, your original cost, plus improvements and less depreciation), or
The drop in fair market value (FMV) of the property as a result of the casualty (that is, the difference between the FMV immediately before and immediately after the casualty).

For business-use or income-producing property that’s completely destroyed, the amount of the loss is the adjusted basis less any salvage value and reimbursements.

If a single casualty involves more than one piece of property, you must figure each loss separately. You then combine these losses to determine the casualty loss.

An exception applies to personal-use real property, such as a home. The entire property (including improvements such as landscaping) is treated as one item. The loss is the smaller of the decline in FMV of the whole property and the entire property’s adjusted basis.

Other limits may apply to the amount of the loss you can deduct, too. For personal-use property, you must reduce each casualty loss by $100 (after you’ve subtracted any salvage value and reimbursement).

If you suffer more than one casualty loss during the tax year, you must reduce each loss by $100 and report each on a separate IRS form. If two or more taxpayers have losses from the same casualty, the $100 rule applies separately to each taxpayer.

But that’s not all. For personal-use property, you also must reduce your total casualty losses by 10% of your adjusted gross income after you’ve applied the $100 rule. As a result, smaller personal-use casualty losses often provide little or no tax benefit.

Keeping necessary records

Documentation is critical to claim a casualty loss deduction. You’ll need to show:

That you were the owner of the property or, if you leased it, that you were contractually liable to the owner for the damage,
The type of casualty and when it occurred,
That the loss was a direct result of the casualty, and
Whether a claim for reimbursement with a reasonable expectation of recovery exists.

You also must be able to establish your adjusted basis, reimbursements and, for personal-use property, pre- and post-casualty FMVs.

Qualifying for IRS relief

This year, the IRS has granted tax relief to taxpayers affected by numerous natural disasters. For example, Hurricane Helene relief was recently granted to the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia. The relief typically extends filing and other deadlines. The IRS may provide additional relief to Hurricane Milton victims. (For detailed information about your area, visit: https://bit.ly/3nzF2ui.)

Be aware that you can be an affected taxpayer even if you don’t live in a federally declared disaster area. You’re considered affected if records you need to meet a filing or payment deadline postponed during the applicable relief period are located in a covered disaster area. For example, if you don’t live in a disaster area but your tax preparer does and is unable to pay or file on your behalf, you likely qualify for filing and payment relief.

Turning to us for help

If you’ve had the misfortune of incurring casualty losses due to a natural disaster, contact us. We’d be pleased to help you take advantage of all available tax benefits and relief.

HEATHER DOERING 10/18/24 HEATHER DOERING 10/18/24

Ease the financial pain of natural disasters with tax relief

Hurricane Helene has affected millions of people in multiple states across the southeastern portion of the country. It’s just one of many weather-related disasters this year. Indeed, natural disasters have led to significant losses for many taxpayers, from hurricanes, tornadoes and other severe storms to the wildfires again raging in the West.

If your family or business has been affected by a natural disaster, you may qualify for a casualty loss deduction and federal tax relief.

Understanding the casualty loss deduction

Factoring in reimbursements

If your casualty loss is covered by insurance, you must reduce the loss by the amount of any reimbursement or expected reimbursement. (You also must reduce the loss by any salvage value.)

Calculating casualty loss

For personal-use property, or business-use or income-producing property that isn’t completely destroyed, your casualty loss is the lesser of:

The adjusted basis of the property immediately before the loss (generally, your original cost, plus improvements and less depreciation), or
The drop in fair market value (FMV) of the property as a result of the casualty (that is, the difference between the FMV immediately before and immediately after the casualty).

For business-use or income-producing property that’s completely destroyed, the amount of the loss is the adjusted basis less any salvage value and reimbursements.

If a single casualty involves more than one piece of property, you must figure each loss separately. You then combine these losses to determine the casualty loss.

Keeping necessary records

Documentation is critical to claim a casualty loss deduction. You’ll need to show:

That you were the owner of the property or, if you leased it, that you were contractually liable to the owner for the damage,
The type of casualty and when it occurred,
That the loss was a direct result of the casualty, and
Whether a claim for reimbursement with a reasonable expectation of recovery exists.

You also must be able to establish your adjusted basis, reimbursements and, for personal-use property, pre- and post-casualty FMVs.

Qualifying for IRS relief

This year, the IRS has granted tax relief to taxpayers affected by numerous natural disasters. For example, Hurricane Helene relief was recently granted to the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia. The relief typically extends filing and other deadlines. (For detailed information about your state, visit: https://bit.ly/3nzF2ui.)

Turning to us for help

If you’ve had the misfortune of incurring casualty losses due to a natural disaster, contact us. We’d be pleased to help you take advantage of all available tax benefits and relief.

HEATHER DOERING 10/9/24 HEATHER DOERING 10/9/24

Taxes take center stage in the 2024 presidential campaign

Early voting for the 2024 election has already kicked off in some states, but voters are still seeking additional information on the candidates’ platforms, including their tax proposals. The details can be hard to come by — and additional proposals continue to emerge from the candidates. Here’s a breakdown of some of the most notable tax-related proposals of former President Donald Trump and Vice President Kamala Harris.

Expiring provisions of the Tax Cuts and Jobs Act (TCJA)

Many of the provisions in the TCJA are scheduled to expire after 2025, including the lower marginal tax rates, increased standard deduction, and higher gift and estate tax exemption. Trump would like to make the individual and estate tax cuts permanent and cut taxes further but hasn’t provided any specifics.

As a senator, Harris voted against the TCJA but recently said she won’t increase taxes on individuals making less than $400,000 a year. This means that she would need to extend some of the TCJA’s tax breaks. She has endorsed President Biden’s 2025 budget proposal, which would return the top individual marginal income tax rate for single filers earning more than $400,000 a year ($450,000 for joint filers) to the pre-TCJA rate of 39.6%.

Harris has also proposed increasing the net investment income tax rate and the additional Medicare tax rate to reach 5% on income above $400,000 a year.

Business taxation

Trump has proposed to decrease the corporate tax rate from its current 21% to 20% (or even lower for companies making products in America). In addition, he’d like to eliminate the 15% corporate alternative minimum tax (CAMT) established by the Inflation Reduction Act. On the other hand, Harris proposes raising the corporate tax rate to 28% — still below the pre-TCJA rate of 35%. She has also proposed to increase the CAMT to 21%.

In addition, Harris has proposed to quadruple the 1% excise tax on the fair market value when corporations repurchase their stock, to reduce the difference in the tax treatment of buybacks and dividends. She would block businesses from deducting the compensation of employees who make more than $1 million, too.

In another proposal, Harris said she’d like to increase the current $5,000 deduction for small business startup expenses to $50,000. The proposal would allow new businesses to allocate the deduction over a period of years or claim the full deduction if they’re profitable.

Individual taxable income

Trump has proposed to eliminate income and payroll taxes on tips for restaurant and hospitality workers. Harris has proposed exempting tips from income taxes. But some experts argue that such policies might prompt employers to reduce tipped workers’ wages, among other negative effects. Harris’s proposal also includes provisions to prevent wealthy individuals from restructuring their compensation to avoid taxation — by, for example, classifying bonuses as tips.

Trump recently proposed excluding overtime pay from taxation. Experts have similarly said this would be vulnerable to abuse. For example, a salaried CEO could be reclassified as hourly to qualify for overtime, with a base pay cut but a dramatic pay increase from overtime hours.

In another proposal, Trump said he would like to exclude Social Security benefits from taxation.

Child Tax Credit

Trump’s running mate, Senator J.D. Vance, has proposed a $5,000-per-child Child Tax Credit (CTC). However, it’s unclear if Trump endorses the proposal. Of note, Senate Republicans recently voted against a bill that would expand the CTC.

Harris has proposed boosting the maximum CTC from $2,000 to $3,600 for each qualifying child under age six, and $3,000 each for all other qualifying children. She would increase the credit to $6,000 for the first year of life. Harris also favors expanding the Earned Income Tax Credit and premium tax credits that subsidize health insurance.

Capital gains

Harris proposes taxing unrealized capital gains (appreciation on assets owned but not yet sold) for the wealthiest taxpayers. Individuals with a net worth exceeding $100 million would face a tax of at least 25% on their income and their unrealized capital gains.

Harris is also calling for individuals with taxable income exceeding $1 million to have their capital gains taxed at ordinary income rates, rather than the current highest long-term capital gains rate of 20%. Unrealized gains at death also would be taxed, subject to a $5 million exemption ($10 million for married couples) and certain other exemptions.

Housing incentives

Trump has alluded to possible tax incentives for first-time homebuyers but without any specifics. The GOP platform calls for reducing mortgage rates by slashing inflation, cutting regulations and opening parts of federal lands to new home construction.

Harris proposes new tax incentives intended to address housing concerns. Among the proposals, she would like to provide up to $25,000 in down-payment assistance to families that have paid their rent on time for two years. She’s also proposed more generous support for first-generation homeowners. In addition, she proposes a tax incentive for homebuilders that build starter homes for first-time homebuyers.

Tariffs

Trump repeatedly has called for higher tariffs on U.S. imports. He would impose a baseline tariff of 10%, with a 60% tariff on imports from China. (In speeches, he’s proposed a 100% tariff on certain imported cars.)

Trump has also suggested eliminating income taxes completely and replacing that revenue through tariffs. Critics argue that this would effectively impose a large tax increase (in the form of higher prices) on tens of millions of Americans who earn too little to pay federal income taxes.

The bottom line

As of this writing, nonpartisan economics researchers project that Trump’s tax and spending proposals would increase the federal deficit by $5.8 trillion over the next decade, compared to $1.2 trillion for Harris’s proposals. That assumes, of course, that all the proposals actually come to fruition, which depends on factors beyond just who ends up in the White House. Congress would have to pass tax bills before the president can sign them into law. Turn to us for the latest tax-related developments.

HEATHER DOERING 8/2/24 HEATHER DOERING 8/2/24

IRS issues final regulations on inherited IRAs

The IRS has published new regulations relevant to taxpayers subject to the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. The final regs, which take effect in 2025, require many beneficiaries to take annual RMDs in the 10 years following the deceased’s death.

SECURE Act ended stretch IRAs

The genesis of the new regs dates back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. One of the many changes in that tax law was the elimination of so-called “stretch IRAs.”

Previously, all beneficiaries of inherited IRAs could stretch RMDs over their entire life expectancies. Younger heirs in particular benefited by taking smaller distributions for decades, deferring taxes while the accounts grew. These heirs also could pass on the IRAs to later generations, deferring the taxes even longer.

The SECURE Act created limitations on which heirs can stretch IRAs. These limits are intended to force beneficiaries to take distributions and expedite the collection of taxes. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) are permitted to stretch out payments over their life expectancies. The following heirs are considered eligible for this favorable treatment:

Surviving spouses,
Children younger than “the age of majority,”
Individuals with disabilities,
Chronically ill individuals, and
Individuals who are no more than 10 years younger than the account owner.

All other heirs (known as designated beneficiaries) are required to take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) of his or her RMDs.

Note: In 2023, under another law, the age at which account owners must begin taking RMDs increased from 72 to 73, pushing the RBD date to April 1 of the year after the account owner turns 73. The age is slated to jump to 75 in 2033.

Proposed regs muddied the waters

In February 2022, the IRS issued proposed regs addressing the 10-year rule — and they brought some bad news for many affected heirs. The proposed regs provided that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. A lump-sum distribution at the end of 10 years wouldn’t be allowed.

The IRS soon heard from confused taxpayers who had recently inherited IRAs or defined contribution plans and didn’t know when they were required to start taking RMDs. Beneficiaries could have been hit with a penalty based on the amounts that should have been distributed but weren’t. This penalty was 50% before 2023 but was lowered to 25% starting in 2023 (or 10% if a corrective distribution was made in a timely manner). The plans themselves could have been disqualified for failing to make RMDs.

As a result, the IRS issued a series of waivers on enforcement of the 10-year rule. With the release of the final regulations, the waivers will come to an end after 2024.

Final regs settle the matter

The IRS reviewed comments on the proposed regs suggesting that if the deceased began taking RMDs before death, the designated beneficiaries shouldn’t be required to continue the annual distributions as long as the remaining account balance is fully distributed within 10 years of death. The final regs instead require these beneficiaries to continue receiving annual distributions.

If the deceased hadn’t begun taking his or her RMDs, though, the 10-year rule is somewhat different. While the account has to be fully liquidated under the same timeline, no annual distributions are required. That gives beneficiaries more opportunity for tax planning.

To illustrate, let’s say that a designated beneficiary inherited an IRA in 2021 from a family member who had begun to take RMDs. Under the waivers, the beneficiary needn’t take RMDs for 2022 through 2024. The beneficiary must, however, take annual RMDs for 2025 through 2030, with the account fully distributed by the end of 2031. Had the deceased not started taking RMDs however, the beneficiary would have the flexibility to not take any distributions in 2025 through 2030. So long as the account was fully liquidated by the end of 2031, the beneficiary would be in compliance.

Additional proposed regs

The IRS released another set of proposed regs regarding other RMD-related changes made by SECURE 2.0, including the age when individuals born in 1959 must begin taking RMDs. Under the proposed regs, the “applicable age” for them would be 73 years.

They also include rules addressing:

The purchase of an annuity with part of an employee’s defined contribution plan account,
Distributions from designated Roth accounts,
Corrective distributions,
Spousal elections after a participant’s death,
Divorce after the purchase of a qualifying longevity annuity contract, and
Outright distributions to a trust beneficiary.

The proposed regs would take effect in 2025.

Timing matters

It’s important to realize that even though RMDs from an inherited IRA aren’t yet required, that doesn’t mean a beneficiary shouldn’t take distributions. If you’ve inherited an IRA or a defined contribution plan and are unsure of whether you should be taking RMDs, contact us. We’d be pleased to help you determine the best course of action for your tax situation.

HEATHER DOERING 7/2/24 HEATHER DOERING 7/2/24

SECURE 2.0: Which provisions went into effect in 2024?

The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act was signed into law in December 2022, bringing more than 90 changes to retirement plan and tax laws. Many of its provisions are little known and were written to roll out over several years rather than immediately taking effect.

Here are several important changes that went into effect in 2024:

Pension-Linked Emergency Savings Accounts (PLESAs). More than half of U.S. adults would turn to borrowing when confronted by an emergency expense of $1,000 or more, according to a Bankrate survey — a figure that has held steady for years. In response, SECURE 2.0 contains provisions related to emergency access to retirement savings, including PLESAs. PLESAs are defined contribution plans designed to encourage workers to save for financial emergencies.

Beginning this year, employers can offer PLESAs linked to employees’ retirement accounts, with the PLESA treated as a Roth, or after-tax, account. Non-highly-compensated employees can be automatically enrolled with a deferral of up to 3% of compensation but no more than $2,500 annually (indexed for inflation) — or less if the employer chooses. Employees can make qualified withdrawals tax- and penalty-free. Employers must allow at least one withdrawal per month, with no fee for the first four per year.

Starter 401(k) plans. SECURE 2.0 creates a new kind of retirement plan for employers not already sponsoring a qualified retirement plan, called a starter 401(k). Employers must automatically enroll all employees at a deferral rate of at least 3% of compensation but no more than 15%. The maximum annual deferral is $6,000 (indexed for inflation), plus the annual IRA catch-up contribution of $1,000 for those age 50 or older. No actual deferral percentage (ADP) or top-heavy testing of the plan is required, reducing the compliance and cost burden for employers.

Employers can impose age and service eligibility requirements, and employees may elect out. They also can choose to contribute at a different level. Employer contributions aren’t allowed, so less record keeping is required.

Top-heavy rules. Defined contribution plans that are considered “top-heavy” must make nonelective minimum contributions equal to 3% of a participant’s compensation. This can represent a significant expense for small employers. Top-heavy plans are those where the aggregate of accounts for key employees exceeds 60% of the aggregate accounts for non-key employees.

Starting in 2024, employers can perform the top-heavy test separately on excludable employees (those who are under age 21 and have less than a year of service) and non-excludable employees. The goal is to eliminate the incentive for employers to exclude employees from the plan to avoid the minimum contribution obligation.

SIMPLE IRAs. SECURE 2.0 boosts the annual Savings Incentive Match Plans for Employees (SIMPLE) IRA and SIMPLE 401(k) deferral limit and the catch-up limit to 110% of the 2024 contribution limits (indexed for inflation) for employers with 25 or fewer employees. Employers with 26 to 100 employees can offer the higher deferral limits if they provide a 4% matching contribution or a 3% employer contribution.

Employers now can make additional contributions to each employee in the plan, as well. Additional contributions must be made in a uniform manner and can’t exceed the lesser of up to 10% of compensation or $5,000 (indexed for inflation) per employee.

Early withdrawal exceptions. SECURE 2.0 allows penalty-free early withdrawals from qualified retirement plans for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Employees have three years to repay such withdrawals; no additional emergency withdrawals are permitted during the three-year repayment period, except to the extent that any previous withdrawals within that period have been repaid. The withdrawals are otherwise limited to once per year.

Victims of domestic abuse by a spouse or partner also are exempt from early withdrawal penalties for the lesser of $10,000 (indexed for inflation) or 50% of their vested account balances. The law’s detailed definition of domestic abuse includes abuse of a participant’s child or another family member living in the same household. Withdrawals can be repaid over a three-year period, and participants can recover income taxes paid on repaid distributions.

Note: An early withdrawal penalty exception for terminally ill individuals took effect in 2023.

Employer-provided student loan relief. Younger employees with large amounts of student debt have sometimes missed out on their employer’s matching contributions to retirement plans. SECURE 2.0 tackles this catch-22 by allowing these employees to receive matching contributions based on their qualified student loan payments. Employers can make matching contributions to 401(k) plans or SIMPLE IRAs. Note that contributions based on student loan payments must be made available to all match-eligible employees.

Section 529 plan rollovers. Beginning this year, owners of certain 529 plans can transfer unused funds intended for qualified education expenses directly to the plan beneficiary’s Roth IRA without incurring any federal tax or the 10% penalty for nonqualified withdrawals.

A beneficiary’s rollover amount is limited to a lifetime maximum of $35,000, and rollovers are subject to the applicable Roth IRA annual contribution limit. Rollover amounts can’t include contributions made to the plan in the previous five years, and the 529 account must have been maintained for at least 15 years.

Required minimum distributions (RMDs). Designated Roth 401(k) and 403(b) plans provided by employers have been subject to annual RMDs in the same way that traditional 401(k)s are. As of 2024, though, the plans aren’t subject to RMDs until the death of the owner.

Act now

Many employers need to amend their plans due to changes related to SECURE 2.0. Fortunately, they generally have until the end of 2025 to make these amendments as long as they comply by the law’s deadlines. Contact us for additional details.

HEATHER DOERING 5/10/24 HEATHER DOERING 5/10/24

IRS extends relief for inherited IRAs

For the third consecutive year, the IRS has published guidance that offers some relief to taxpayers covered by the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. But the IRS also indicated in Notice 2024-35 that forthcoming final regulations for the rule will apply for the purposes of determining RMDs from such accounts in 2025.

Beneficiaries face RMD rule changes

The need for the latest guidance traces back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Among other changes, the law eliminated so-called “stretch IRAs.”

Pre-SECURE Act, all beneficiaries of inherited IRAs were allowed to stretch the RMDs on the accounts over their entire life expectancies. For younger heirs, this meant they could take smaller distributions for decades, deferring taxes while the accounts grew. They also had the option to pass on the IRAs to later generations, which deferred the taxes for even longer.

To avoid this extended tax deferral, the SECURE Act imposed limitations on which heirs can stretch IRAs. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) may stretch payments over their life expectancies. The following heirs are EDBs:

Surviving spouses,
Children younger than the “age of majority,”
Individuals with disabilities,
Chronically ill individuals, and
Individuals who are no more than 10 years younger than the account owner.

All other heirs (“designated beneficiaries”) must take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) for RMDs. (In 2023, the age at which account owners must start taking RMDs rose from age 72 to age 73, pushing the RBD date to April 1 of the year after account owners turn 73.)

In February 2022, the IRS issued proposed regs that came with an unwelcome surprise for many affected heirs. They provide that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. In other words, they aren’t permitted to wait until the end of 10 years to take a lump-sum distribution. This annual RMD requirement gives beneficiaries much less tax planning flexibility and could push them into higher tax brackets during those years.

Confusion reigns

It didn’t take long for the IRS to receive feedback from confused taxpayers who had recently inherited IRAs or defined contribution plans and were unclear about when they were required to start taking RMDs on the accounts. The uncertainty put both beneficiaries and defined contribution plans at risk. How? Beneficiaries could have been dinged with excise tax equal to 25% of the amounts that should have been distributed but weren’t (reduced to 10% if the RMD failure is corrected in a timely manner). The plans could have been disqualified for failure to make RMDs.

In response to the concerns, only six months after the proposed regs were published, the IRS waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. It also excused missed 2022 RMDs if the participant died in 2021 on or after the RBD.

The waiver guidance indicated that the IRS would issue final regs that would apply no earlier than 2023. But then 2023 rolled around — and the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the RBD.

Now the IRS has again extended the relief, this time for RMDs in 2024 from an IRA or defined contribution plan when the deceased passed away during the years 2020 through 2023 on or after the RBD. If certain requirements are met, beneficiaries won’t be assessed a penalty on missed RMDs, and plans won’t be disqualified based solely on such missed RMDs.

Delayed distributions aren’t always best

In a nutshell, the succession of IRS waivers means that designated beneficiaries who inherited IRAs or defined contributions plans after 2019 aren’t required to take annual RMDs until at least 2025. But some individuals may be better off beginning to take withdrawals now, rather than deferring them. The reason? Tax rates could be higher beginning in 2026 and beyond. Indeed, many provisions of the Tax Cuts and Jobs Act, including reduced individual income tax rates, are scheduled to sunset after 2025. The highest rate will increase from 37% to 39.6%, absent congressional action.

What if the IRS reverses course on the 10-year rule, allowing a lump sum distribution in the tenth year rather than requiring annual RMDs? Even then, it could prove worthwhile to take distributions throughout the 10-year period to avoid a hefty one-time tax bill at the end.

On the other hand, beneficiaries nearing retirement likely will benefit by delaying distributions. If they wait until they’re no longer working, they may be in a lower tax bracket.

Stay tuned

The IRS stated in its recent guidance that final regs “are anticipated” to apply for determining RMDs for 2025. However, based on the tax agency’s actions in the past few years, skepticism about that is understandable. We’ll continue to monitor future IRS guidance and keep you informed of any new developments.

HEATHER DOERING 4/26/24 HEATHER DOERING 4/26/24

IRS issues guidance on tax treatment of energy efficiency rebates

The Inflation Reduction Act (IRA) established and expanded numerous incentives to encourage taxpayers to increase their use of renewable energy and adoption of a range of energy efficient improvements. In particular, the law includes funding for nearly $9 billion in home energy rebates.

While the rebates aren’t yet available, many states are expected to launch their programs in 2024. And the IRS recently released some critical guidance (Announcement 2024–19) on how it’ll treat the rebates for tax purposes.

The rebate programs

The home energy rebates are available for two types of improvements. Home Efficiency Rebates apply to whole-house projects that are predicted to reduce energy usage by at least 20%. These rebates are applicable to consumers who reduce their household energy use through efficiency projects. Examples include the installation of energy efficient air conditioners, windows and doors.

The maximum rebate amount is $8,000 for eligible taxpayers with projects with at least 35% predicted energy savings. All households are eligible for these rebates, with the largest rebates directed to those with lower incomes. States can choose to provide a way for homeowners or occupants to receive the rebates as an upfront discount, but they aren’t required to do so.

Home Electrification and Appliance Rebates are available for low- or moderate-income households that upgrade to energy efficient equipment and appliances. They’re also available to individuals or entities that own multifamily buildings where low- or moderate-income households represent at least 50% of the residents. These rebates cover up to 100% of costs for lower-income families (those making less than 80% of the area median income) and up to 50% of costs for moderate-income families (those making 80% to 150% of the area median income). According to the Census Bureau, the national median income in 2022 was about $74,500 — meaning some taxpayers who assume they won’t qualify may indeed be eligible.

Depending on your state of residence, you could save up to:

$8,000 on an ENERGY STAR-certified electric heat pump for space heating and cooling,
$4,000 on an electrical panel,
$2,500 on electrical wiring,
$1,750 on an ENERGY STAR-certified electric heat pump water heater, and
$840 on an ENERGY STAR-certified electric heat pump clothes dryer and/or an electric stove, cooktop, range or oven.

The maximum Home Electrification and Appliance Rebate is $14,000. The rebate amount will be deducted upfront from the total cost of your payment at the “point of sale” in participating stores if you’re purchasing directly or through your project contractors.

The tax treatment

In the wake of the IRA’s enactment, questions arose about whether home energy rebates would be considered taxable income by the IRS. The agency has now put the uncertainty to rest, with guidance stating that rebate amounts won’t be treated as income for tax purposes. However, rebate recipients must reduce the basis of the applicable property by the rebate amount.

If a rebate is provided at the time of sale of eligible upgrades and projects, the amount is excluded from a purchaser’s cost basis. For example, if an energy-efficient equipment seller applies a $500 rebate against a $600 sales price, your cost basis in the property will be $100, rather than $600.

If the rebate is provided at a later time, after purchase, the buyer must adjust the cost basis similarly. For example, if you spent $600 to purchase eligible equipment and later receive a $500 rebate, your cost basis in the equipment drops from $600 to $100 upon receipt of the rebate.

Interplay with the Energy Efficient Home Improvement Credit

The IRS guidance also addresses how the home energy rebates affect the Energy Efficient Home Improvement Credit. As of 2023, taxpayers can receive a federal tax credit of up to 30% of certain qualified expenses, including:

Qualified energy efficiency improvements installed during the year,
Residential energy property expenses, and
Home energy audits.

The maximum credit each year is:

$1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150), and
$2,000 per year for qualified heat pumps, biomass stoves or biomass boilers.

Taxpayers who receive home energy rebates and are also eligible for the Energy Efficient Home Improvement Credit must reduce the amount of qualified expenses used to calculate their credit by the amount of the rebate. For example, if you purchase an eligible product for $400 and receive a $100 rebate, you can claim the 30% credit on only the remaining $300 of the cost.

Act now?

While the IRA provides that the rebates are available for projects begun on or after August 16, 2022, projects must fulfill all federal and state program requirements. The federal government, however, has indicated that it’ll be difficult for states to offer rebates for projects completed before their programs are up and running. In the meantime, though, projects might qualify for other federal tax breaks. Contact us to determine the most tax-efficient approach to energy efficiency.

HEATHER DOERING 12/18/23 HEATHER DOERING 12/18/23

IRS delays new reporting rule for online payment processors

For the second consecutive year, the IRS has postponed implementation of a new rule that would have led to an estimated 44 million taxpayers receiving tax forms from payment apps and online marketplaces such as Venmo and eBay. While the delay should spare such taxpayers some confusion, it won’t affect their tax liability or income reporting responsibilities. And the IRS indicated that it intends to begin phasing in the rule in 2024.

The new reporting rule

The rule concerns IRS Form 1099-K, Payment Card and Third Party Network Transactions, an information return first introduced in 2012. The form is issued to report payments from:

Credit, debit and stored-value cards such as gift cards, and
Payment apps or online marketplaces (also known as third-party settlement organizations).

If you receive direct payments via credit, debit or gift card, you should receive the form from your payment processors or payment settlement entity. But for years, payment apps and online marketplaces have been required to send Form 1099-K only if the payments you receive for goods and services total more than $20,000 from more than 200 transactions (although they can choose to send you the form with lower amounts).

The form reports the gross amount of all reportable transactions for the year and by the month. The IRS also receives a copy.

The American Rescue Plan Act (ARPA), enacted in March 2021, significantly expanded the reach of Form 1099-K. The changes were designed to improve voluntary tax compliance for these types of payments. According to the IRS, tax compliance is higher when amounts are subject to information reporting.

Under ARPA, payment apps and online marketplaces must report payments of more than $600 for the sale of goods and services; the number of transactions is irrelevant. As a result, the form would be sent to many more taxpayers who use payment apps or online marketplaces to accept payments. The rule change could ensnare not only small businesses and individuals with side hustles but also “casual sellers” of used personal items like clothing, furniture and other household items.

The change originally was scheduled to take effect for the 2022 tax year, with the forms going out in January 2023. However, in December 2022, the IRS announced its first implementation delay and released guidance stating that 2022 would be a transition period for the change.

The agency also acknowledged that the change must be managed carefully to help ensure that 1) the forms are issued only to taxpayers who should receive them, and 2) taxpayers understand what to do as a result of this reporting.

The updated implementation plan

In a November 2023 report, the U.S. Government Accountability Office (GAO) stated that the IRS expects to receive about 44 million Form 1099-Ks in 2024 — an increase of around 30 million. The GAO found, however, that the “IRS does not have a plan to analyze these data to inform enforcement and outreach priorities.”

Less than a week later, the IRS announced a second delay in the rule change, explaining that the previous thresholds ($20,000 / more than 200 transactions) remain in place for 2023. The agency cited feedback from taxpayers, tax professionals and payment processors, as well as the possibility of taxpayer confusion.

It seemed likely confusion would ensue when the forms started hitting mailboxes in January 2024. For example, with forms sent by payment apps or online marketplaces, it’s not clear how taxpayers should transfer the reported amounts to their individual tax returns. The income shown on the form might be properly reported on the recipient’s:

Schedule C, Profit or Loss from Business (Sole Proprietorship),
Schedule E, Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.), or
Appropriate return for a partnership or corporation.

In addition, the gross amount of a reported payment doesn’t include any adjustments for credits, cash equivalents, discounts, fees, refunds or other amounts — so the full amount reported might not be the taxable amount.

Moreover, not every reportable transaction is taxable. If you sell a personal item on eBay at a loss, for example, you aren’t required to pay tax on the sale. If you met the $600 threshold, though, that sale would appear on your Form 1099-K.

Be aware that the IRS isn’t abandoning the lower threshold. In its latest announcement, the agency indicated that a transitional threshold of $5,000 will apply for tax year 2024. This phased-in approach, the IRS says, will allow it to review its operational processes to better address taxpayer and stakeholder concerns.

Advice for Form 1099-K recipients

If you receive a Form 1099-K under the existing thresholds, the IRS advises you to review the form carefully to determine whether the amounts are correct. You also should identify any related deductible expenses you may be able to claim on your return.

If the form includes personal items that you sold at a loss, the IRS says you should “zero out” the payment on your return by reporting both the payment and an offsetting adjustment on Form 1040, Schedule 1. If you sold such items at a gain, you must report the gain as taxable income.

Taxes remain the same

It’s worth repeating that the delay in the implementation of the new Form 1099-K threshold doesn’t affect taxpayers’ obligations to report income on their tax returns. All income is taxable unless excluded by law, regardless of whether a taxpayer receives a Form 1099-K. If you have questions regarding Form 1099-K reporting, please contact us.

HEATHER DOERING 11/19/23 HEATHER DOERING 11/19/23

Take action now to reduce your 2023 income tax bill

A number of factors are making 2023 a confounding tax planning year for many people. They include turbulent markets, stabilizing but still high interest rates and significant changes to the rules regarding retirement planning. While much uncertainty remains, the good news is that you still have time to implement year-end tax planning strategies that may reduce your income tax bill for the year. Here are some steps to consider as 2023 comes to a close.

Manage your itemized deductions

The standard deduction for 2023 is $13,850 for single filers, $27,700 for married couples filing jointly and $20,800 for heads of households. Those levels are higher than they were before the Tax Cuts and Jobs Act (TCJA), which has reduced the number of taxpayers who itemize their deductions. But “bunching” certain outlays may help you qualify for a higher amount of itemized deductions.

Bunching involves timing deductible expenditures so they accumulate in a specific tax year and total more than the standard deduction. Likely candidates include:

Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI),
Mortgage interest,
Investment interest,
State and local taxes,
Casualty and theft losses from a federally declared disaster, and
Charitable contributions.

It’s worth noting that there’s been talk in Washington of capping the value of itemized deductions (for example, at 28%). This proposal could come up again if the expiration of several TCJA provisions at the end of 2025 prompts new tax legislation, making it wise to maximize the value of such deductions while you can.

Leverage your charitable giving options

Several strategies are available to increase the charitable contribution component of your itemized deductions. For example, you can donate appreciated assets that you’ve held for at least one year. In addition to avoiding capital gains tax — and, if applicable, the net investment income tax — on the appreciation, you can deduct the fair market value of donated investments and the cost basis for nonstock donations. (Remember that AGI-based limits apply to charitable contribution deductions.)

Although it won’t affect your charitable contribution deduction, you also might want to make a qualified charitable distribution (QCD) from a retirement account with required minimum distributions (RMDs). You can distribute up to $100,000 per year (indexed annually for inflation) directly to a qualified charity after age 70½. The distribution doesn’t count toward your charitable deduction, but it’s removed from your taxable income and is treated as an RMD.

Pay yourself, not the IRS

If possible, you generally should maximize the annual savings contributions that can reduce your taxable income, including those to 401(k) plans, traditional IRAs, Health Savings Accounts (HSAs) and 529 plans. The 2023 limits are:

401(k) plans: $22,500 ($30,000 if age 50 or older).
Traditional IRAs: $6,500 ($7,500 if age 50 or older).
HSAs: $3,850 for self-only coverage and $7,750 for family coverage (those 55 and older can contribute an additional $1,000).
529 plans: $17,000 per person (or $34,000 for a married couple) per recipient without implicating gift tax (individual states set contribution limits).

Contributing to 529 plans has become even more appealing now that, beginning in 2024, you can transfer unused amounts to the beneficiary’s Roth IRA (subject to certain limits and requirements).

Harvest your losses

The up-and-down financial markets this year may provide the opportunity to harvest your “loser” investments that are valued below their cost basis, and use the losses to offset your gains. If the losses exceed your capital gains for the year, you can use the excess to offset up to $3,000 of ordinary income and carry forward any remaining losses.

It’s vital, however, that you comply with the so-called wash-sale rule. The rule bans the deduction of a loss when you acquire “substantially identical” investments within 30 days before or after the sale date.

Execute a Roth conversion

Recent market declines also may make this a smart time to think about converting some or all of your traditional IRA to a Roth IRA — because you can convert more shares without increasing your income tax liability. Yes, you must pay income tax in 2023 on the amount converted, but you might be able to minimize the impact by, for example, converting only to the top of your current tax bracket.

Moreover, the long-term benefits can outweigh the immediate tax effect. After conversion, the funds will grow tax-free. You generally can withdraw “qualified distributions” tax-free as long as you have held the account for at least five years; and Roth IRAs don’t come with RMD obligations. Plus, you can withdraw from a Roth IRA tax- and penalty-free for a first-time home purchase (up to $10,000), qualified birth or adoption expenses (up to $5,000), and qualified higher education expenses (with no limit).

Bear in mind, though, that a Roth conversion may leave you with a higher AGI. That could limit how much you benefit from tax breaks that phase out based on AGI or modified adjusted gross income.

Review your estate plan

Your estate plan probably won’t affect your 2023 income taxes, but it makes sense to review it now in light of the expiration of certain TCJA provisions, including its generous gift and estate tax exemption, at the end of 2025. For example, the TCJA nearly doubled the exemption back in 2018, which is currently $12.92 million ($25.84 million for married couples). A return to a pre-TCJA level of $5 million (adjusted for inflation) could have dramatic implications to your estate plan.

In addition, the lingering high interest rate environment may make certain estate planning strategies more attractive. For example, the value of gifts to qualified personal residence trusts and charitable remainder trusts generally is lower when rates are high.

Cover your bases

And, of course, the tried-and-true methods for reducing your taxes — such as deferring income and accelerating expenses — are always worth considering. Of course, if you expect to be in a higher tax bracket in 2024, these methods aren’t helpful. Contact the FMD team for more information on how we can help you plot the right course for your circumstances.

HEATHER DOERING 7/31/23 HEATHER DOERING 7/31/23

IRS provides transitional relief for RMDs and inherited IRAs

The IRS has issued new guidance providing transitional relief related to recent legislative changes to the age at which taxpayers must begin taking required minimum distributions (RMDs) from retirement accounts. The guidance in IRS Notice 2023-54 also extends relief already granted to taxpayers covered by the so-called “10-year rule” for inherited IRAs and other defined contribution plans.

The need for RMD relief

In late 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act brought numerous changes to the retirement and estate planning landscape. Among other things, it generally raised the age at which retirement account holders must begin to take their RMDs. The required beginning date (RBD) for traditional IRAs and other qualified plans was raised from age 70½ to 72.

Three years later, in December 2022, the SECURE 2.0 Act increased the RBD age for RMDs further. This year the age increased to 73, and it’s scheduled to climb to 75 in 2033.

The RBD is defined as April 1 of the calendar year following the year in which an individual reaches the applicable age. Therefore, an IRA owner who was born in 1951 will have an RBD of April 1, 2025, rather than April 1, 2024. The first distribution made to the IRA owner that will be treated as a taxable RMD will be a distribution made for 2024.

While the delayed onset of RMDs is largely welcome news from an income tax perspective, it has caused some confusion among retirees and necessitated updates to plan administrators’ automatic payment systems. For example, retirees who were born in 1951 and turn 72 this year may have initiated distributions this year because they were under the impression that they needed to start taking RMDs by April 1, 2024.

Administrators and other payors also voiced concerns that the updates could take some time to implement. As a result, they said, plan participants and IRA owners who would’ve been required to start receiving RMDs for calendar year 2023 before SECURE 2.0 (that is, those who reach age 72 in 2023) and who receive distributions in 2023 might have had those distributions mischaracterized as RMDs. This is significant because RMDs aren’t eligible for a tax-free rollover to an eligible retirement plan, so the distributions would be includible in gross income for tax purposes.

The IRS response

To address these concerns, the IRS is extending the 60-day deadline for rollovers of distributions that were mischaracterized as RMDs due to the change in the RBD from age 72 to age 73. The deadline for rolling over such distributions made between January 1, 2023, and July 31, 2023, is now September 30, 2023.

For example, if a plan participant born in 1951 received a single-sum distribution in January 2023, and part of it was treated as ineligible for a rollover because it was mischaracterized as an RMD, the plan participant will have until the end of September to roll over that portion of the distribution. If the deadline passes without the distribution being rolled over, the distribution will then be considered taxable income.

The rollover also applies to mischaracterized IRA distributions made to an IRA owner (or surviving spouse). It applies even if the owner or surviving spouse rolled over a distribution within the previous 12 months, although the subsequent rollover will preclude the owner or spouse from doing another rollover in the next 12 months. (The individual could still make a direct trustee-to-trustee transfer.)

Plan administrators and payors receive some relief, too. They won’t be penalized for failing to treat any distribution made between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that participant’s surviving spouse) as an eligible rollover distribution if the distribution would’ve been an RMD before SECURE 2.0’s change to the RBD.

The 10-year rule conundrum

Prior to the enactment of the original SECURE Act, beneficiaries of inherited IRAs could “stretch” the RMDs on the accounts over their entire life expectancies. The stretch period could run for decades for younger heirs, allowing them to take smaller distributions and defer taxes while the accounts grew. These heirs then had the option to pass their IRAs to later generations, potentially deferring tax payments even longer.

To accelerate tax collection, the SECURE Act eliminated the rules permitting stretch RMDs for many heirs (referred to as designated beneficiaries, as opposed to eligible designated beneficiaries, or EDBs). For IRA owners or defined contribution plan participants who died in 2020 or later, the law generally requires that the entire balance of the account be distributed within 10 years of death. The rule applies regardless of whether the deceased dies before, on or after the RBD for RMDs from the plan. (EDBs may continue to stretch payments over their life expectancies or, if the deceased died before the RBD, may elect the 10-year rule treatment.)

According to proposed IRS regulations released in February 2022, designated beneficiaries who inherit an IRA or defined contribution plan before the deceased’s RBD can satisfy the 10-year rule by taking the entire sum before the end of the calendar year that includes the 10-year anniversary of the death. Notably, though, if the deceased dies on or after the RBD, designated beneficiaries would be required to take taxable annual RMDs (based on their life expectancies) in years one through nine, receiving the remaining balance in year 10. They can’t wait until the end of 10 years and take the entire account as a lump-sum distribution. The annual RMD rule would provide designated beneficiaries less tax-planning flexibility and could push them into higher tax brackets during those years, especially if they’re working.

The 10-year rule and the proposed regs left many designated beneficiaries who recently inherited IRAs or defined contribution plans bewildered as to when they needed to begin taking RMDs. For example, the IRS heard from heirs of deceased family members who died in 2020. These heirs hadn’t taken RMDs in 2021 and were unsure whether they were required to take them in 2022.

In recognition of the lingering questions, the IRS previously waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. It also excused missed 2022 RMDs if the participant died in 2021 on or after the RBD. The latest guidance extends that relief by excusing 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the RBD.

The relief means covered individuals needn’t worry about being hit with excise tax equal to 25% of the amounts that should’ve been distributed but weren’t (or 10% if the failure to take the RMD is corrected in a timely manner). And plans won’t be penalized for failing to make an RMD in 2023 that would be required under the proposed regs.

Final regs are pending

The IRS also announced in the guidance that final regs related to RMDs will apply for calendar years no sooner than 2024. Previously, the agency had said final regs would apply no earlier than 2023. We’ll let you know when the IRS publishes the final regs and how they may affect you. Contact FMDwith any questions.

HEATHER DOERING 6/8/23 HEATHER DOERING 6/8/23

What’s in the Fiscal Responsibility Act?

President Biden has signed into law the new debt ceiling agreement that he reached with U.S. House of Representatives Speaker Kevin McCarthy (R-CA). The Fiscal Responsibility Act (FRA) suspends — as opposed to raising — the debt ceiling until 2025, after the next presidential election.

The FRA also makes a variety of changes related to domestic spending, although it falls far short of the cuts included in the Republican bill that the House passed in April 2023, with no changes to the GOP’s long-time targets of Social Security and Medicare. Nonetheless, the Congressional Budget Office (CBO) projects the law will reduce the federal deficit by about $1.5 trillion over 10 years.

The main provisions

The new law primarily tackles discretionary spending. The notable provisions address:

IRS funding. The Inflation Reduction Act (IRA), which was enacted in 2022, included an additional $80 billion in funding for the tax agency, with much of it designated for heightened enforcement activity against wealthy taxpayers. The FRA immediately rescinds $1.39 billion and pares back the funding by about $10 billion each year for 2024 and 2025. However, White House officials have indicated that they expect the funding cuts to make little difference in the IRS’s pending expansion plans because the agency planned to spend the original funding over several years. It may be able to spend some of the funds earmarked for later years earlier and then return to Congress to request more funding in the future.

Spending caps. One of the more contentious focuses of the negotiations was non-defense discretionary funding for programs such as scientific research, domestic law enforcement, forest management, environmental protection, air traffic control, and nutritional assistance for mothers. The final result is a virtual freeze on this spending, facilitated in part by the reduced funding for the IRS. The spending will drop by about $1 billion in the 2024 fiscal year, compared to this fiscal year, with a 1% increase slated for the 2025 fiscal year. This amounts to a cut, as inflation is expected to grow at a rate greater than 1%. The final non-defense figures are $704 billion for 2024 and $711 billion for 2025.

Defense and veterans affairs spending. The FRA provides Biden’s budgeted funding for the military and veterans affairs for 2024, adjusted for inflation. Total defense spending will grow to $886 billion in 2024 and $895 billion in 2025.

Student loan debt. The new law codifies Biden’s previous announcement that the moratorium on student loan payments precipitated by the COVID-19 pandemic won’t be extended beyond this summer. His plan to cancel student loan debt for many borrowers — to the tune of $430 billion — isn’t part of the law. (However, the plan is currently under review by the U.S. Supreme Court.)

Work requirements. Certain recipients of Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) benefits will face new work requirements, although Medicaid recipients won’t. Specifically, the FRA raises the top age at which adults without children living in their homes must work to receive SNAP assistance, from 49 to 54, phased in over three years. However, the law includes exemptions for the homeless, veterans and individuals age 24 or younger who were children in foster care. It also includes provisions that could increase the number of individuals who must satisfy work requirements to receive TANF benefits from their state programs. Yet, the CBO estimates that the various changes will actually result in more people receiving assistance.

COVID-19 clawback. Much of the remaining unspent COVID-19 relief funds, estimated to equal $30 billion to $70 billion, will be “clawed back.” Portions of that funding will be retained, though, including a certain amount for vaccines.

Permitting for energy projects. The FRA includes rules to make it easier for new energy projects, including fossil fuel projects, to obtain permit approval.

The leftovers

As noted, the original House debt ceiling bill was much more aggressive. Republicans sought larger spending cuts and tighter work requirements. They also aimed to repeal hundreds of billions in tax incentives in the IRA intended to increase the use of renewable energy and combat climate change.

On the other side of the aisle, Democrats hoped to raise taxes on corporations and taxpayers who earn more than $400,000. In addition, they wanted to institute measures to reduce Medicare spending on prescription drugs.

None of these priorities are included in the new law.

The bottom line

Experts have noted that the outcome of the latest debt ceiling challenge largely resembles the likely outcome of budget negotiations in a divided government, albeit with much more drama and more drastic potential implications for the global economy. Moreover, additional bills related to appropriations — what the parties have referred to as “agreed upon adjustments” — are expected in coming months, which could reduce the effects of some of the spending cuts.

HEATHER DOERING 3/22/23 HEATHER DOERING 3/22/23

U.S. Supreme Court rules against the IRS on critical FBAR issue

The U.S. Supreme Court recently weighed in on an issue regarding a provision of the Bank Secrecy Act (BSA) that has split two federal courts of appeal. Its 5-4 ruling in Bittner v. U.S. is welcome news for U.S. residents who “non-willfully” violate the law’s requirements for the reporting of certain foreign bank and financial accounts on what’s generally known as an FBAR. The full name of an FBAR is the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts.

Reporting requirement

The BSA requires “U.S. persons” to annually file an FBAR to report all financial interests in, or signature or other authority over, financial accounts located outside the country (with certain exceptions) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The term “U.S. person” includes a citizen, resident, corporation, partnership, limited liability company, trust or estate.

According to related regulations, individuals with fewer than 25 accounts in a given year must provide details about each. Filers with 25 or more accounts aren’t required to list each or provide specific details; they need only provide the number of accounts and certain other basic information. FBARs generally are due on April 15, with an automatic extension to Oct. 15 if the April deadline isn’t met.

Under the BSA, a willful violation of the requirement is subject to a civil penalty up to the greater of $100,000 or 50% of the balance of the account at issue. A provision prescribes a penalty of up to $10,000 for a non-willful violation of the filing requirement (with an exception for reasonable cause). Criminal penalties also may be imposed.

Violations at issue

The case before the Supreme Court was brought by Alexandru Bittner, a dual citizen of Romania and the United States. He testified that he learned of the reporting obligations after returning to the United States in 2011. Bittner subsequently submitted the required annual reports for 2007 through 2011.

The IRS deemed his FBARs deficient because they didn’t include all of the relevant accounts. Bittner then filed corrected reports with information for each of his accounts. Although the IRS didn’t contest the accuracy of the new filings or find that his previous errors were willful, it determined the penalty was $2.72 million — $10,000 for each of 272 accounts reported in five FBARs.

Bittner went to court to contest the penalty, arguing that it applies on a per-report basis, not per account — so he owed only $50,000 in penalties for his non-willful violations. The district court agreed, but the Fifth Circuit Court of Appeals reversed the ruling, siding with the IRS. By contrast, the Ninth Circuit, in U.S. v. Boyd, found in 2021 that the BSA authorized “only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” That meant it was up to the Supreme Court to settle the issue.

High court’s ruling

The Supreme Court agreed with Bittner’s interpretation of the BSA’s penalty provision for FBAR violations. It cited multiple sources that supported this conclusion.

For example, the Court noted that Congress had explicitly authorized per-account penalties for some willful violations. When Congress includes particular language in one section of a statute but omits that language from another, it explained, the Court normally understands the difference in language as conveying a difference in meaning. In other words, Congress obviously knew how to tie penalties to account-level information if that was its intent.

The Court also highlighted various public guidance from the IRS, including instructions for earlier versions of the FBAR and an IRS fact sheet. These references, the Court said, suggested to the public that the failure to file a report represents a single violation that exposes a non-willful violator to a single $10,000 penalty. (Note: The Supreme Court emphasized that such guidance wasn’t “controlling” or decisive, but only informed its analysis.)

Implications for taxpayers

The Supreme Court’s ruling significantly reduces taxpayers’ potential financial exposure for non-willful violations of the FBAR reporting requirements. The reports typically list multiple accounts, meaning the IRS’s interpretation could have led to tens of thousands of dollars in penalties for a single violation.

As the Court also pointed out, an individual with only three accounts who made non-willful errors when providing account-specific details would face a potential penalty of $30,000, regardless of how slight the errors or the value of the accounts. But a person with 300 bank accounts would shoulder far less risk because he or she is required to disclose only the correct number of accounts, with no details. Similarly, a person with a $10 million balance in a single account who fails to report the account would be subject to a penalty of $10,000 — while someone who fails to report a dozen accounts with an aggregate balance of $10,001 would be subject to a penalty of $120,000.

It’s important to note that the Supreme Court’s ruling applies only to non-willful failures to file. The penalties for violations that are knowing, intentional, reckless or due to willful blindness aren’t subject to the per-report limit and may be assessed on a per-account basis, with costly ramifications.

Questions remain

The Supreme Court’s ruling in Bittner should bring relief to taxpayers who’ve non-willfully violated the BSA’s filing requirement, but it didn’t clear all uncertainty around FBAR penalties. For example, the Court didn’t address the mens rea (level of intent) on the part of the taxpayer that the IRS must establish to impose a non-willful penalty or whether penalties for violations of the BSA’s recordkeeping requirements are determined on a per-account basis. We can help you avoid these thorny questions by ensuring you properly comply with your FBAR obligations.

HEATHER DOERING 2/16/23 HEATHER DOERING 2/16/23

Reading the tea leaves: Potential tax legislation in the new Congress

The 2022 mid-term election has shifted the scales in Washington, D.C., with the Democrats no longer controlling both houses of Congress. While it remains to be seen if — and when — any tax-related legislation can muster the requisite bipartisan support, a review of certain provisions in existing laws may provide an indication of the many areas ripe for action in the next two years.

Retirement catch-ups at risk

The SECURE 2.0 Act, enacted at the tail end of 2022, reportedly includes a technical drafting error that jeopardizes the abilities of taxpayers to make catch-up contributions to their pre-tax or Roth retirement accounts. According to the American Association of Pension Professionals and Actuaries, under the existing statutory language, no participants will be able to make such contributions beginning in 2024.

The American Retirement Association has brought the issue to the attention of the U.S. Department of Treasury and the Joint Committee on Taxation (JCT), a nonpartisan congressional committee that assists with federal tax legislation. While the JCT has apparently acknowledged that the language does appear to be a drafting error, a timely correction is far from guaranteed.

Indeed, such “technical corrections” legislation once passed Congress routinely. However, it has proven more challenging in the political climate of the last decade or so. For example, it took three years for Congress to pass minor corrections to the first SECURE Act. And a glitch in the Tax Cuts and Jobs Act of 2017 (TCJA) affecting eligibility for bonus depreciation wasn’t corrected until the CARES Act became law in 2020.

Expiring tax provisions

Tax-related legislation often includes so-called “sunset” dates — the dates tax provisions will expire, absent congressional action. For example, the Consolidated Appropriations Act, enacted in 2021, boosted the allowable deduction for business meals from 50% to 100% for 2021 and 2022. In 2023, the deduction limit returned to 50%.

A JCT report released in January 2023 highlights numerous significant provisions that are scheduled to expire in coming years without congressional action to extend them. For example, several tax credits related to renewable and alternative energy will expire at the end of 2024.

But 2026 is the year when some of the most wide-reaching and particularly valuable provisions — many of them created or modified by the TCJA — are set to disappear. They include:

Lower individual tax rates,
Enhancements to the Child Tax Credit (CTC),
Health insurance premium tax credit enhancements,
The New Markets Tax Credit,
The employer credit for paid family and medical leave,
The Work Opportunity Tax Credit,
The increase in the exemption amount and phaseout threshold for the alternative minimum tax,
The increase in the standard deduction,
The suspension of the miscellaneous itemized deduction,
The suspension of the limit on itemized deductions,
The income exclusion for employer payments of student loans,
The suspension of the deduction for personal exemptions,
The limit on the deduction for qualified residence interest,
The suspension of the deduction for home equity interest,
The limit on the deduction for state and local taxes,
The qualified business income deduction,
The deduction percentages for foreign-derived intangible income and global intangible low-taxed income,
Empowerment zone tax incentives, and
The increase in the federal gift and estate tax exemption.

At the end of 2026, bonus depreciation also is slated for elimination. In fact, the allowable deduction already has dropped from 100% to 80% of the cost of qualified assets in 2023. The limit will drop by 20% each year until vanishing in 2027.

Expired tax provisions

Several notable provisions expired or changed at the end of 2021, despite chatter in Washington about the possibility of extensions. For example, as of 2022, taxpayers can no longer deduct Section 174 research and experimentation expenses, including software development costs, in the year incurred. Rather, they must amortize these expenses over five years (or 15 years if incurred outside of the United States). In addition, the calculation of adjusted taxable income for purposes of the limit on the business interest deduction has changed, potentially reducing the allowable deduction for some taxpayers.

Individuals also saw the end of several tax provisions at the end of 2021, including the:

CTC expansions created by the American Rescue Plan for some taxpayers,
Expanded child and dependent care credit,
Increased income exclusion for employer-provided dependent care assistance,
Treatment of mortgage insurance premiums as deductible mortgage interest,
Charitable contribution deduction for non-itemizers, and
Increased percentage limits for charitable contributions of cash.

It’s possible that some of these could be included in any “extender” legislation Congress might consider this year or next.

The FairTax Act

Unlikely to see much progress, however, is the proposed FairTax Act. Although it has the support of a group of U.S. House Republicans, GOP House Speaker Kevin McCarthy has stated that he doesn’t support the legislation.

The bill would eliminate most federal taxes — including individual and corporate income, capital gains, payroll and estate taxes — as well as the IRS. It would replace the taxes with a 23% federal sales tax on goods and services, which couldn’t be offset by deductions or tax credits. The plan has been around for two decades and has yet to garner a floor vote, an indicator of its odds this time around — especially with Democrats in control of the U.S. Senate.

Ear to the ground

Congress may not feel a sense of urgency to address tax provisions that aren’t set to expire for three years, but the catch-up contribution error would have substantial repercussions for many taxpayers in less than a year. We’ll let you know if lawmakers take action on this or any other important tax matters that could affect you.

HEATHER DOERING 11/8/22 HEATHER DOERING 11/8/22

5 Steps to Take Now to Cut Your 2022 Tax Liability

It has been quite a year — high inflation, rising interest rates and a bear stock market. While there’s not a lot you can do about any of these financial factors, you may have some control over how your federal tax bill for the year turns out. Here are some strategies to consider executing before year end that may reduce your 2022 or future tax liability.

1. Convert your traditional IRA to a Roth IRA

The down stock market could make this an especially lucrative time to convert all or some of the funds in a traditional pre-tax IRA to an after-tax Roth IRA. Although you must pay income tax on the amount converted in 2022, Roth accounts hold some significant advantages over their traditional counterparts.

Unlike traditional IRAs, for example, Roths aren’t subject to required minimum distributions (RMDs). The funds in a Roth will appreciate tax-free. Qualified future distributions also will be tax-free, which will pay off if you’re subject to higher tax rates at that time, whether due to RMDs or other income.

How does the poorly performing stock market incentivize a Roth conversion? If your traditional IRA contains stocks or mutual funds that have lost significant value, you can convert more shares than you could if they were worth more, for the same amount of tax liability.

Roth conversions are also advisable if you have lower income and therefore are in a lower tax bracket this year. Perhaps you lost your job at the end of 2021 and didn’t resume working until this past summer, or you’re retired but not yet receiving Social Security payments. You may be able to save by converting before the end of the year.

Currently, you can use a Roth conversion as a workaround for the income limits on your ability to contribute to Roth IRAs — what’s known as a backdoor Roth IRA — because converted funds aren’t treated as contributions. But be aware that, if you’re under age 59½, you can’t access the transferred funds without penalty.

Further, be aware that a Roth conversion will likely increase your adjusted gross income (AGI). As such, it could affect your eligibility for tax breaks that phase out based on AGI or modified adjusted gross income (MAGI).

2. Defer or accelerate income and deductions

A common tax reduction technique is to defer income into the next year and accelerate deductions into the current year. Doing so can allow you to make the most of tax breaks that phase out based on income (such as the IRA contribution deduction, child tax credits and education tax credits). If you’re self-employed, for example, you might delay issuing invoices until late December (increasing the odds they won’t be paid until 2023) and make equipment purchases in December, rather than January (assuming you use cash-basis accounting).

On the other hand, you might want to defer deductions and accelerate income if you expect to land in a higher tax bracket in the future. You can accelerate income by, for example, realizing deferred compensation, exercising stock options, recognizing capital gains or engaging in a Roth conversion.

High-income individuals should think about income deferral from the perspective of the 3.8% net investment income tax (NIIT), too. The NIIT kicks in when MAGI is more than $200,000 for single and head of household filers, $250,000 for married filing jointly and $125,000 for married filing separately. Deferring investment income could mean escaping that potentially hefty tax bite.

3. Manage your itemized deductions wisely

Accelerating deductions generally is helpful only if you itemize your deductions, of course. If you don’t think you’ll qualify to itemize, think about “bunching” itemized deductions so that they exceed the standard deduction (in 2022, $12,950 for single filers, $25,900 for married filing jointly and $19,400 for heads of household). If you claim itemized deductions this year and the standard deduction next year, you could end up with a larger two-year total deduction than if you took the standard deduction both years.

Potential expenses ripe for bunching include medical and dental expenses (if you qualify to deduct eligible expenses that exceed 7.5% of your AGI), charitable contributions, and state and local tax (SALT). For example, you could get dental services before year end, make your 2022 and 2023 charitable donations in December of this year, and pre-pay property taxes due next year, if possible.

The deduction for SALT-like property tax generally is subject to a $10,000 cap. Check, though, to determine if you might be able to take advantage of a pass-through entity (PTE) tax. More than two dozen states and New York City have enacted these laws, which permit a PTE to pay state tax at the entity level, rather than the individual taxpayer level. PTEs aren’t subject to a federal limit on SALT deductions.

4. Give to charity

The AGI limit for deductible cash donations has returned to 60% of AGI for 2022. But the possibility for substantial savings from making a charitable donation remains. For example, if you donate appreciated assets that you’ve held at least one year, you can deduct their fair market value and avoid income tax on the amount of appreciation if you itemize.

A qualified charitable distribution (QCD) from your IRA may confer tax benefits. Taxpayers who are age 70½ years or older can make a direct transfer of up to $100,000 per year from their IRAs to a qualified charity — and exclude the transferred amount from their gross income. (Note that transfers to a donor-advised fund or supporting organization don’t qualify). If you’re age 72 or older, a QCD can count toward your RMDs, as well.

You also may want to explore establishing a donor-advised fund. You can set it up and contribute assets in 2022 to claim a deduction for this year, while delaying your selection of the recipient charity and the actual contribution until 2023.

5. Harvest your capital losses

This is another way to leverage the poor market performance in 2022 — selling off your investments that have lost value to offset any capital gains. If your capital losses exceed your capital gains, you can deduct up to $3,000 ($1,500 for married filing separately) a year from your ordinary income and carry forward any remaining excess indefinitely.

You could further juice the benefit of loss harvesting by donating the proceeds from the sale to charity. You’ll offset realized gains while boosting your charitable contribution deduction (subject to AGI limitations on the charitable contribution deduction).

Take heed of the wash-rule, though. It says you can’t write-off losses if you acquire “substantially identical” securities within 30 days before or after the sale.

Act now

It’s been a rocky financial year for many people, and uncertainty about the economy will continue into next year. One thing is certain, though — everyone wants to cut their tax bills. Contact us to help you with your year-end tax planning.

HEATHER DOERING 11/7/22 HEATHER DOERING 11/7/22

What Do the 2023 Cost-of-Living Adjustment Numbers Mean for You?

The IRS recently issued its 2023 cost-of-living adjustments for more than 60 tax provisions. With inflation up significantly this year, many amounts increased considerably over 2022 amounts. As you implement 2022 year-end tax planning strategies, be sure to take these 2023 adjustments into account.

Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax-bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopts the C-CPI-U on a permanent basis.

Individual Income Taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $725, to $1,450, depending on filing status, but the top of the 35% bracket increases by $22,950 to $45,900, again depending on filing status.

The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2023, the standard deduction will be $27,700 (married couples filing jointly), $20,800 (heads of households), and $13,850 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law unless Congress extends the current rules or revises them.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help taxpayers who typically used to itemize deductions.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2023, the threshold for the 28% bracket will increase by $14,600 for all filing statuses except married filing separately, which increased by half that amount.

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2023 will be $81,300 for singles and $126,500 for joint filers, increasing by $5,400 and $8,400, respectively, over 2022 amounts. The inflation-adjusted phaseout ranges for 2023 will be $578,150–$903,350 (singles) and $1,156,300–$1,662,300 (joint filers). Amounts for married couples filing separately are half of those for joint filers.

Education and child-related breaks

The maximum benefits of certain education and child-related breaks generally remain the same for 2023. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges will generally remain the same or increase modestly for 2023, depending on the break. For example:

The American Opportunity credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the American Opportunity credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit per eligible student is $2,500.

The Lifetime Learning credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the Lifetime Learning credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit is $2,000 per tax return.

The adoption credit. The phaseout ranges for eligible taxpayers adopting a child will also increase for 2023 — by $15,820, to $239,230–$279,230 for joint, head-of-household and single filers. The maximum credit will increase by $1,060, to $15,950 for 2023.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2023, the amounts will be $12.92 million (up from $12.06 million for 2022).

The annual gift tax exclusion will increase by $1,000 to $17,000 for 2023.

Retirement plans

Nearly all retirement-plan-related limits will increase for 2023. Thus, depending on the type of plan you have, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2023.

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
- For a spouse who participates, the 2023 phaseout range limits will increase by $7,000, to $116,000–$136,000.
- For a spouse who doesn’t participate, the 2023 phaseout range limits will increase by $14,000, to $218,000–$228,000.
For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2023 phaseout range limits will increase by $5,000, to $73,000–$83,000.

Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,500 contribution limit for 2023 (plus $1,000 catch-up, if applicable, and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

For married taxpayers filing jointly, the 2023 phaseout range limits will increase by $14,000, to $218,000–$228,000.
For single and head-of-household taxpayers, the 2023 phaseout range limits will increase by $9,000, to $138,000–$153,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Crunching the numbers

With the 2023 cost-of-living adjustment amounts soaring higher than 2022 amounts, it’s important to understand how they might affect your tax and financial situation. We’d be happy to help crunch the numbers and explain the best tax-saving strategies to implement based on the 2023 numbers.

HEATHER DOERING 9/9/22 HEATHER DOERING 9/9/22

Clean Vehicle Credit Comes With Caveats

The Inflation Reduction Act (IRA) includes a wide range of tax incentives aimed at combating the dire effects of climate change. One of the provisions receiving considerable attention from consumers is the expansion of the Qualified Plug-in Electric Drive Motor Vehicle Credit (IRC Section 30D), now known as the Clean Vehicle Credit.

While the expanded credit seems promising, questions have arisen about just how immediate its impact will be. Here’s what you need to know about the credit if you’re thinking about purchasing an electric vehicle (EV).

The credit in a nutshell

The Qualified Plug-in Electric Drive Motor Vehicle Credit has been around since 2008. For passenger vehicles and light trucks acquired after December 31, 2009, the credit starts at $2,500. Vehicles with battery capacities rated at five kilowatt hours qualify for an additional $417, plus an additional $417 for each kilowatt hour of capacity exceeding five kilowatt hours. The credit’s maximum amount is $7,500.

The credit amount begins to phase out for a manufacturer’s vehicle when at least 200,000 qualifying vehicles have been sold for use in the United States (for sales after December 31, 2009). As a result of this limitation, vehicles, including those manufactured by Tesla and General Motors, no longer qualify for the credit.

The IRA extends the newly named Clean Vehicle Credit through December 31, 2032. It also makes several significant changes to the credit, most of which will phase in over time. For example, the credit now applies to any “clean” vehicle, so a hydrogen fuel cell car or a plug-in hybrid could qualify. It also eliminates the manufacturer production cap after 2022.

The IRA leaves intact the $7,500 max credit amount but bifurcates it. You can earn a $3,750 credit if the qualifying vehicle meets a critical minerals requirement and another $3,750 credit if the vehicle meets a new battery component requirement (see “Potential hurdles” below).

The credit now includes income limitations, too. It’s not available to:

Single filers with modified adjusted gross income (MAGI) over $150,000,
Married couples filing jointly with MAGI over $300,000, or
Heads of household with MAGI over $225,000.

The credit is also limited by the price of the vehicle. Vans, pickup trucks and SUVs with manufacturer’s suggested retail prices (MSRPs) of more than $80,000 don’t qualify. Other cars must have MSRPs no higher than $55,000.

One critical change took effect immediately after President Biden signed the bill into law: the so-called “final assembly” requirement. It limits the credit to vehicles for which final assembly occurred in North America. Final assembly generally refers to the production of an EV at the location from which it’s delivered to a seller with all of the necessary component parts included. The requirement is designed to encourage domestic production.

The IRS has established a two-step process to check whether a specific vehicle satisfies the final assembly requirement. First, check the Department of Energy’s Alternative Fuels Data Center’s list of 2022 and 2023 EVs that likely meet the requirement (https://bit.ly/3An4yYz). Be aware that because some models are assembled in multiple locations, some of the listed vehicles might not meet the requirement.

Then, to confirm that a specific vehicle’s final assembly occurred in North America, enter its Vehicle Identification Number (VIN) into the National Highway Traffic Safety Administration’s VIN decoder tool (https://bit.ly/3dOLUkF). By scrolling to the bottom of the result page, you’ll see the vehicle’s “Plant Information,” which includes the country where the plant is located.

For now, taxpayers who purchase qualifying EVs will continue to claim a credit on their annual tax returns. The IRA, however, provides an alternative — and much more taxpayer-friendly — option beginning in 2024. At that point, EV purchasers can transfer their credit to dealers at the point of sale, rather than waiting to claim it on their annual tax returns. The credit will directly and immediately reduce the purchase price.

Potential hurdles

The IRA imposes “applicable percentage” requirements for critical minerals and battery components. At least 40% of critical minerals must be 1) processed or extracted from the United States or a country with which the United States has a free trade agreement, or 2) recycled in North America. At least 50% of battery components must be manufactured or assembled in North America.

The initial percentages will take effect after the IRS issues proposed guidance, which the IRA mandates occur before December 31, 2022. The percentages then ramp up over time, peaking at 80% of critical minerals after 2026 and 100% of battery components after 2028.

And the credit isn’t available for vehicles with critical minerals or battery components from a “foreign entity of concern,” including China and Russia. The critical mineral exclusion takes effect for vehicles placed in service after 2024. The battery component exclusion is effective for vehicles placed in service after 2023.

These rules have raised concerns among the automotive industry, particularly as a substantial amount of the supply chain for minerals and battery components is located in China.

Transitional relief for purchasers

What if you signed a contract on an EV before August 16, 2022, when the IRA was enacted, but haven’t yet received the vehicle? The IRS has stated that the changes in the law won’t affect your tax credit. You can claim it under the rules in effect when you signed the purchase contract.

Unfortunately, that means the manufacturer cap will still apply. If you purchase a vehicle from a manufacturer that hit the 200,000 vehicle threshold more than a year prior, you don’t qualify for the EV credit. On the other hand, the final assembly requirement won’t apply.

If you purchase and take possession of a qualifying EV after the law was signed (August 16, 2022) but before January 1, 2023, the only difference to the prior rules is the applicability of the final assembly requirement. That means the manufacturer cap also would apply to your purchase. So, if you’re interested in a model that’s disqualified under the cap, it might pay off to wait until 2023 if the vehicle meets the requirements then.

New credits for used and commercial vehicles

The IRA also creates tax credits for used EVs (Sec. 25E) and commercial EVs (Sec. 45W), both starting in 2023. The IRS has indicated it will release more information on these credits in the coming months.

According to the IRA, the Sec. 25E credit is worth the lesser of $4,000 or 30% of a qualified vehicle’s sale price. The sale price can’t exceed $25,000. The credit is available only for EVs with model years at least two years earlier than the year of purchase. No credit is available if the lesser of the taxpayer’s MAGI for the year of purchase or the preceding year exceeds:

$75,000 for single filers,
$150,000 for married couples filing jointly, or
$112,500 for heads of household.

The credit for commercial EVs is the lesser of 1) 15% of the vehicle’s basis (30% for vehicles not powered by a gas or diesel engine) or 2) the incremental cost of the vehicle over the cost of a comparable gas- or diesel-powered vehicle. The maximum credit per vehicle is $7,500 for vehicles with a gross vehicle weight under 14,000 pounds and $40,000 for heavier vehicles.

Only the beginning

The IRS and Treasury Department have promised to issue additional guidance about the various new and existing EV-related tax credits in the coming weeks and months. We’ll keep you up to date on new developments.

HEATHER DOERING 9/6/22 HEATHER DOERING 9/6/22

IRS Offers Penalty Relief for 2019, 2020 Tax Years

While the recently announced student loan debt relief has captured numerous headlines, it’s estimated that another federal relief program announced on the same day will provide more than $1.2 billion in tax refunds or credits. Specifically, IRS Notice 2022-36 extends penalty relief to both individuals and businesses who missed the filing deadlines for certain 2019 and/or 2020 tax and information returns. The relief covers many of the most commonly filed forms

Broad relief for late taxpayers

The intent behind the penalty relief is two-fold: 1) to help taxpayers negatively affected by the COVID-19 pandemic, and 2) to allow the IRS to focus on processing backlogged tax returns and taxpayer correspondence. As recently as late May 2022, the IRS had a backlog of more than 21 million unprocessed paper returns. The goal is for the IRS to return to normal operations for the 2023 filing season.

To that end, the notice provides relief from the failure-to-file penalty. The penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. To qualify for the relief, an income tax return must be filed on or before Sept. 30, 2022.

Banks, employers and other businesses that are required to file various information returns (for example, the Form 1099 series) also may qualify for relief. Eligible 2019 returns must have been filed by Aug. 3, 2020, and eligible 2020 returns must have been filed by Aug. 2, 2021.

Potentially eligible forms include:

Form 1040, “U.S. Individual Income Tax Return,” and other forms in the Form 1040 series
Form 1041, “U.S. Income Tax Return for Estates and Trusts,” and other forms in the Form 1041 series
Form 1065, “U.S. Return of Partnership Income”
Returns filed in the Form 1120 series including:
- Form 1120, “U.S. Corporation Income Tax Return”
- Form 1120-C, “U.S. Income Tax Return for Cooperative Associations”
- Form 1120-F, “U.S. Income Tax Return of a Foreign Corporation”
- Form 1120-FSC, “U.S. Income Tax Return of a Foreign Sales Corporation”
- Form 1120-H, “U.S. Income Tax Return for Homeowners Associations”
- Form 1120-L, “U.S. Life Insurance Company Income Tax Return”
- Form 1120-ND, “Return for Nuclear Decommissioning Funds and Certain Related Persons”
- Form 1120-PC, “U.S. Property and Casualty Insurance Company Income Tax Return”
- Form 1120-POL, “U.S. Income Tax Return for Certain Political Organizations”
- Form 1120-REIT, “U.S. Income Tax Return for Real Estate Investment Trusts”
- Form 1120-RIC, “U.S. Income Tax Return for Regulated Investment Companies”
- Form 1120-SF, “U.S. Income Tax Return for Settlement Funds (Under Section 468B)”
- Form 1120-S, “U.S. Income Tax Return for an S Corporation”
Form 1066, “U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return”
Forms concerning exempt organizations
Certain international information returns

Notably, the relief doesn’t extend to failure-to-file penalties for Form 8938, “Statement of Specified Foreign Financial Assets,” or FinCEN Report 114, “Report of Foreign Bank and Financial Accounts.”

Some other exceptions apply. Penalty relief isn’t available if:

A fraudulent return was filed,
The penalty was part of an accepted offer-in-compromise or a closing agreement with the IRS, or
The penalty was finally determined by a court.

In addition, the IRS isn’t providing relief for the failure-to-pay penalty or other penalties. Such ineligible penalties may, however, qualify for previously existing penalty relief procedures, including the reasonable cause defense or the IRS’s First Time Abatement Program.

No action required

The penalty relief is automatic. If you qualify, you need not apply for it or reach out to the IRS in any way. Penalties that have already been assessed will be abated. If you’ve already paid a covered penalty, the IRS says, you should receive a refund or credit by Sept. 30, 2022.

Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Congress eyes further retirement savings enhancements

In 2019, the bipartisan Setting Every Community Up for Retirement Enhancement Act (SECURE Act) — the first significant legislation related to retirement savings since 2006 — became law. Now Congress appears ready to build on that law to further increase Americans’ retirement security.

The U.S. House of Representatives passed the Securing a Strong Retirement Act by a 414-5 vote. Also known as SECURE 2.0, the bill contains numerous provisions that — if enacted — would affect both individuals and employers, including in the following areas.

Catch-up contributions

Currently, qualified individuals age 50 or older can make catch-up contributions, on top of the standard contribution limits, to certain retirement accounts — an extra $6,500 for 401(k) plan accounts and $3,000 for SIMPLE plans. Beginning in 2024, SECURE 2.0 would boost those figures for individuals age 62 to 64 to $10,000 for 401(k)s and $5,000 for SIMPLE plans (indexed for inflation). In addition, the $1,000 annual catch-up for IRAs, which hasn’t changed in years, would be indexed going forward.

The bill also would change the taxation of catch-up contributions, reducing the upfront tax savings for those who max out their annual contributions. Such contributions would be treated as post-tax Roth contributions starting in 2023. Under existing law, you can choose whether to make catch-up contributions on a pre- or post-tax basis. SECURE 2.0 would also allow you to determine whether your employer’s matching contributions should be treated as pre- or post-tax. Currently, these contributions can be pre-tax only.

RMDs

The SECURE Act eased the rules for required minimum distributions (RMDs) from traditional IRAs and other qualified plans. It generally raised the age at which you must begin to take your RMDs — and pay taxes on them — from 70½ to 72.

SECURE 2.0 would increase the age over the course of a decade. As of 2023, RMDs wouldn’t be mandated until age 73, going up to age 74 in 2030 and age 75 in 2033. This would give you more time to grow your retirement savings tax-free, bearing in mind that delayed RMDs may translate to larger withdrawal requirements down the road.

The bill would relax the penalty for failing to take full RMDs, too. Currently, the failure results in a 50% excise tax of the amount that should have been withdrawn. SECURE 2.0 would reduce the tax to 25% beginning in 2023. If corrected in a “timely” manner, the penalty would further drop to 10%.

QCDs

Some taxpayers use qualified charitable distributions (QCDs) to satisfy both their RMD requirements and their philanthropic inclinations. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity after age 70½. You can’t claim a charitable deduction for this donation, but the distribution is removed from taxable income.

The bill would make this option more attractive. It would annually index the $100,000 limit for inflation. It also would allow you to make a one-time QCD transfer of up to $50,000 through a charitable gift annuity or charitable remainder trust (as opposed to directly to the charity). Both provisions would take effect in the taxable year following enactment of the law.

Automatic enrollment

The House bill would require employers to automatically enroll all newly eligible employees in their 401(k) plans at a deduction rate of at least 3% (but no more than 10%) of the employee’s pay, increasing it by 1% each year until the employee is contributing 10%. Employees could opt out or change their contribution rates.

Annuities

Annuities can help reduce the risk that retirees run out of money during their lifetimes. The SECURE Act encouraged reluctant employers to offer annuities by immunizing them from breach of fiduciary duty liability if they choose an annuity provider that meets certain requirements.

But an actuarial test in the regulations for RMDs has interfered with the availability of annuities. For example, the test commonly prohibits annuities with guaranteed annual increases of only 1% to 2%, return of premium death benefits and period-certain guarantees. Without such guarantees, though, many individuals are hesitant to choose an annuity option in a defined contribution plan or IRA. SECURE 2.0 would specify that these guarantees are allowed. The changes would take effect upon enactment of the law.

Matching contributions on student loan payments

SECURE 2.0 recognizes that many employees are unable to contribute to their retirement accounts because of student loan payment responsibilities. Such employees miss out on matching contributions from their employers.

The bill would allow employers to contribute to certain retirement plans for employees who are making qualified student loan payments. If enacted, this would take effect for contributions made for plan years beginning after 2022.

Part-time employee eligibility

The SECURE Act generally requires employers to allow part-time employees who work at least 500 hours for three consecutive years to participate in their 401(k) plans. Under SECURE 2.0, part-time employees would need to work at least 500 hours for only two consecutive years to be eligible for their employer’s 401(k) plan. The provision would be effective for plan years beginning after 2022.

Small business tax credits

SECURE 2.0 would create or enhance some tax credits for small businesses for tax years after 2022. For example, the SECURE Act increased the potential amount of the credit for retirement plan startup costs by capping it at $5,000 (up from $500). The three-year credit currently is available for 50% of “qualified startup costs” for employers with no more than 100 employees.

The new bill hikes the credit to 100% of qualified costs for employers with up to 50 employees. It provides an additional credit, too, except for defined benefit plans. The additional amount generally is a percentage of the amount the employer contributes on behalf of employees, up to $1,000 per employee. The full additional credit is limited to employers with 50 or fewer employees, gradually phasing out for employers with 51 to 100 employees.

Next steps

While the odds for passage of some form of retirement savings reform seem high in light of the bipartisan support for the SECURE Act and the new House bill, it remains to be seen what form it’ll take. The Senate is working its own bill, and the two would need to be reconciled before it reaches President Biden’s desk. The final legislation could add to, revise or remove the provisions described above. We’ll keep you up to date.

Ashleigh Laabs 3/2/22 Ashleigh Laabs 3/2/22

The IRS again eases Schedules K-2 and K-3 filing requirements for 2021

The IRS has announced additional relief for pass-through entities required to file two new tax forms — Schedules K-2 and K-3 — for the 2021 tax year. Certain domestic partnerships and S corporations won’t be required to file the schedules, which are intended to make it easier for partners and shareholders to find information related to “items of international tax relevance” that they need to file their own returns.

In 2021, the IRS released guidance providing penalty relief for filers who made “good faith efforts” to adopt the new schedules. The IRS has indicated that its latest, more sweeping move comes in response to continued concern and feedback from the tax community and other stakeholders.

A tough tax season for the IRS

The announcement of additional relief comes as IRS Commissioner Charles Rettig has acknowledged that the agency faces “enormous challenges” this tax season. For example, millions of taxpayers are still waiting for prior years’ returns to be processed.

To address such issues, he says, the IRS has taken “extraordinary measures,” including mandatory overtime for IRS employees, the creation and assignment of “surge teams,” and the temporary suspension of the mailing of certain automated compliance notices to taxpayers. In addition, the partial suspension of the Schedules K-2 and K-3 filing requirements might ease the burden for both affected taxpayers and the IRS.

K-2 and K-3 filing requirements

Provisions of the Tax Cuts and Jobs Act, which was enacted in 2017, require taxpayers to provide significantly more information to calculate their U.S. tax liability for items of international tax relevance. The Schedule K-2 reports such items, and the Schedule K-3 reports a partner’s distributive share of those items. These schedules replace portions of Schedule K and numerous unformatted statements attached to earlier versions of Schedule K-1.

Schedules K-2 and K-3 generally must be filed with a partnership’s Form 1065, “U.S. Return of Partnership Income,” or an S corporation’s Form 1120-S, “U.S. Income Tax Return for an S Corporation.” Previously, partners and S corporation shareholders could obtain the information that’s included on the schedules through various statements or schedules the respective entity opted to provide, if any. The new schedules require more detailed and complete reporting than the entities may have provided in the past.

In January of 2022, the IRS surprised many in the tax community when it posted changes to the instructions for the schedules. Under the revised instructions, an entity may need to report information on the schedules even if it had no foreign partners, foreign source income, assets generating such income, or foreign taxes paid or accrued.

For example, if a partner claims a credit for foreign taxes paid, the partner might need certain information from the partnership to file his or her own tax return. Although some narrow exceptions apply, this change substantially expanded the pool of taxpayers required to file the schedules.

Good faith exception

IRS Notice 2021-39 exempted affected taxpayers from penalties for the 2021 tax year if they made a good faith effort to comply with the filing requirements for Schedules K-2 and K-3. When determining whether a filer has established such an effort, the IRS considers, among other things:

The extent to which the filer has made changes to its systems, processes and procedures for collecting and processing the information required to file the schedules,
The extent the filer has obtained information from partners, shareholders or a controlled foreign partnership or, if not obtained, applied reasonable assumptions, and
The steps taken by the filer to modify the partnership or S corporation agreement or governing instrument to facilitate the sharing of information with partners and shareholders that’s relevant to determining whether and how to file the schedules.

The IRS won’t impose the relevant penalties for any incorrect or incomplete reporting on the schedules if it determines the taxpayer exercised the requisite good faith efforts.

Latest exception

Under the latest guidance, announced in early February, partnerships and S corporations need not file the schedules if they satisfy all of the following requirements:

For the 2021 tax year:
- The direct partners in the domestic partnership aren’t foreign partnerships, corporations, individuals, estates or trusts, and
- The domestic partnership or S corporation has no foreign activity, including 1) foreign taxes paid or accrued, or 2) ownership of assets that generate, have generated or may reasonably be expected to generate foreign-source income.
For the 2020 tax year, the domestic partnership or S corporation didn’t provide its partners or shareholders — nor did they request — information regarding any foreign transactions.
The domestic partnership or S corporation has no knowledge that partners or shareholders are requesting such information for the 2021 tax year.

Entities that meet these criteria generally aren’t required to file Schedules K-2 and K-3. But there’s an important caveat. If such a partnership or S corporation is notified by a partner or shareholder that it needs all or part of the information included on Schedule K-3 to complete its tax return, the entity must provide that information.

Moreover, if the partner or shareholder notifies the entity of this need before the entity files its own return, the entity no longer satisfies the criteria for the exception. As a result, it must provide Schedule K-3 to the partner or shareholder and file the schedules with the IRS.

Temporary reprieves

The IRS guidance on the exceptions to the Schedules K-2 and K-3 filing requirement explicitly refers to 2021 tax year filings. In the absence of additional or updated guidance, partnerships and S corporations should expect and prepare to file the schedules for current and future tax years. We can help ensure you have the necessary information on hand.