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.

© 2023

Higher interest rates spark interest in charitable remainder trusts

If you wish to leave a charitable legacy while generating income during your lifetime, a charitable remainder trust (CRT) may be a viable solution. In addition to an income stream, CRTs offer an up-front charitable income tax deduction, as well as a vehicle for disposing of appreciated assets without immediate taxation on the gain. Plus, unlike certain other strategies, CRTs become more attractive if interest rates are high. Thus, in the current environment, that makes them particularly effective.

How these trusts work

A CRT is an irrevocable trust to which you contribute stock or other assets. The trust pays you (or your spouse or other beneficiaries) income for life or for a term of up to 20 years, then distributes the remaining assets to one or more charities. When you fund the trust, you’re entitled to a charitable income tax deduction (subject to applicable limits) equal to the present value of the charitable beneficiaries’ remainder interest.

There are two types of CRTs, each with its own pros and cons:

• A charitable remainder annuity trust (CRAT) pays out a fixed percentage (ranging from 5% to 50%) of the trust’s initial value and doesn’t allow additional contributions once it’s funded.

• A charitable remainder unitrust (CRUT) pays out a fixed percentage (ranging from 5% to 50%) of the trust’s value, recalculated annually, and allows additional contributions.

CRATs offer the advantage of uniform payouts, regardless of fluctuations in the trust’s value. CRUTs, on the other hand, allow payouts to keep pace with inflation because they increase as the trust’s value increases. And, as noted, CRUTs allow you to make additional contributions. One potential disadvantage of a CRUT is that payouts shrink if the trust’s value declines.

CRTs and a high-interest-rate environment

To ensure that a CRT is a legitimate charitable giving vehicle, IRS guidelines require that the present value of the charitable beneficiaries’ remainder interest be at least 10% of the trust assets’ value when contributed. Calculating the remainder interest’s present value is complicated, but it generally involves estimating the present value of annual payouts from the trust and subtracting that amount from the value of the contributed assets.

The computation is affected by several factors, including the length of the trust term (or the beneficiaries’ ages if payouts are made for life), the size of annual payouts and an IRS-prescribed Section 7520 rate. If you need to increase the value of the remainder interest to meet the 10% threshold, you may be able to do so by shortening the trust term or reducing the payout percentage.

In addition, the higher the Sec. 7520 rate is at the time of the contribution, the lower the present value of the payouts and, therefore, the larger the remainder interest. In recent years, however, rock-bottom interest rates made it difficult, if not impossible, for many CRTs to qualify. As interest rates have risen, it has become easier to meet the 10% threshold and increase annual payouts or the trust term without disqualifying the trust.

Now may be the time for a CRT

If you’ve been exploring options for satisfying your charitable goals while generating an income stream for yourself and your family, now may be an ideal time for a CRT. Contact your FMD advisor if you have questions.

© 2023