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Congress enacts advance tax rebates and other tax breaks in the CARES Act

Congress passed and President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act (H.R. 748)  on March 28, 2020.  Here are some highlights of tax provisions of the Act.

Advance tax rebates

The provision that has received the most publicity is advance tax rebates of $1,200 for single persons and $2,400 for married couples who file joint income tax returns.  In addition to these amounts, $500 will be included in the advance tax rebate for each dependent child claimed by the taxpayer(s) who qualifies for the child tax credit under Internal Revenue Code Section 24.

The rebates will be mailed or electronically deposited as soon as possible by the IRS to provide relief to Americans who are suffering from the shutdown of our society to fight the coronavirus pandemic.

Not everyone will qualify.  The rebates are reduced to not below zero by 5% of the taxpayer’s adjusted gross income above $150,000 for married couples filing joint returns, $112,500 for heads of households, and $75,000 for other taxpayers.

Nonresident aliens, anyone who is claimed as a dependent, estates and trusts don’t qualify for the rebate.

The IRS will make a preliminary determination based on the last income tax return filed for 2018 or 2019, or for seniors who do not file an income tax return, their social security record.

When the taxpayer prepares his or her 2020 federal individual income tax return, the rebate will be recomputed based on the current year facts.  Any additional rebate will be allowed as a credit on the income tax return.  The taxpayer gets to keep any excess of the amount received over the computed amount.

The rebate reduces the federal income tax and any amount already received by the taxpayer and is treated as an refund received in amount.  The rebate isn’t taxable income.  The rebate can be more than the tax before the rebate and is refundable.

Waived early withdrawal penalty for certain retirement plan distributions

Taxpayers who receive a distribution from a qualified retirement plan or an IRA before they reach age 59 1/2 are normally subject to a 10% federal early distribution penalty.

The penalty will be waived for up to $100,000 of distributions during 2020 to an individual (1) who is diagnosed with coronavirus, (2) whose spouse or dependent is diagnosed with coronavirus, or (3) who experiences financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the coronavirus crisis, being unable to work due to lack of child care due to the virus, closing or reducing hours of a business owned or operated by the individual due to the virus, or other factors as determined by the IRS.

Unless the taxpayer elects out, the income from a coronavirus-related distribution will be spread ratably over a 3-taxable year period, beginning with with the distribution year (2020.)

Although these distributions won’t be eligible under the usual rules for rollovers or trustee-to-trustee transfers, corona virus-related distributions from a qualified plan or an IRA may be repaid to the qualified plan or an IRA within 3 years beginning the day after the date the distribution was received.  The amount repaid will be treated as a direct trustee-to-trustee transfer within 60 days of the distribution.

It appears claiming the recharacterization of the distribution for any repayments will be reported on an amended 2020 income tax return.

Required minimum distributions aren’t required for 2020

The required minimum distributions that apply to defined contribution qualified retirement plans (401(k)s and profit sharing plans) and IRAs after a participant reaches age 72 (age 70 1/2 before the SECURE Act was enacted) is waived for 2020.

If an employee reached age 70 1/2 during 2019, so the employee has a required beginning date on April 1, 2020, the penalty is also waived for that payment.

For years after 2020, the required minimum distributions will be computed by the regular procedure (beginning balance divided by life expectancy) without regard to the 2020 required minimum distribution and the required beginning date will be unchanged for other income tax determination purposes.

Charitable contributions limits for individuals increased

Individuals who don’t itemize deductions on their federal income tax returns will be able to deduct on their 2020 federal income tax returns up to $300 of charitable contributions that would otherwise qualify, except for donations to a donor advised fund or a private foundation.

The limitation for itemized deductions of cash charitable contributions to public charities by individuals, normally 60% of adjusted gross income, is eliminated for 2020.

Charitable contributions limit for corporations increased

The limit for charitable contributions for C corporations is increased for charitable contributions paid in cash during calendar year 2020 to public charities from 10% of modified taxable income to 25% of modified taxable income.

Charitable contributions limit for food inventory

For noncorporate taxpayers, the limit for charitable contributions of food inventory is increased from 15% to 25% of the taxpayer’s aggregate net income for 2020 from all trades or businesses from which such contributions were made.

For C corporations, the limit for charitable contributions of food inventory is increased from 15% to 25% of modified taxable income.

Exclusion for employer payments on student loans

Effective for payments made after March 28, 2020 and before January 1, 2021, payments by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan incurred by the employee for education of the employee are excluded from the employee’s taxable income.  The employee won’t be eligible to claim an interest deduction for the excluded amount.

Payroll tax credit for certain employers

Employers who have their business operations fully or partially suspended during a calendar quarter due to orders from a government authority due to the coronavirus during the period beginning with the first calendar quarter beginning after December 31, 2019 for which gross receipts are less than 50% of gross receipts for the same calendar quarter in the prior year and ending with the calendar quarter for which gross receipts are greater than 80% of the gross receipts for the prior year and all tax-exempt organization during 2020 are eligible for an employee retention tax credit of 50% of qualified wages of up to $10,000 for each employee for all calendar quarters.

Note that employers who receive a small business interruption loan aren’t eligible for this credit.  (The loan may be eligible for forgiveness, and that would be double-dipping.)  If the employer claims the credit and receives a loan in a subsequent quarter, the credit will be recaptured.

The credit is effective for wages paid after March 12, 2020 and before January 1, 2021.

The credit is limited to the 6.2% employer share of social security taxes for all employees during the calendar quarter, but any credit in excess of that amount is treated as an overpayment and is refundable to the employer.  (Note that medicare taxes and federal unemployment taxes aren’t eligible to be offset by the credit.)

The credit is reduced for credits allowed for employment of qualified veterans, research expenditures of qualified small businesses, and payroll tax credits for paid sick and paid family and medical leave provided in the Families First Coronavirus Response Act.

For employers having an average of more than 100 full-time employees during 2019, qualified wages means wages paid with respect to which an employee is not providing services due to a government-ordered suspension or a period of significant decline in gross receipts, but not in excess of the amount the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period.

For employers with an average of 100 or fewer full-time employees in 2019, qualified wages means wages paid with respect to an employee during any period of a government-ordered suspension or during a quarter that is within a period of significant decline in gross receipts.

Qualified wages don’t include any amounts taken in account for payroll tax credits provided in the Families First Coronavirus Response Act.

Qualified wages includes the employer’s qualified health plan expenses properly allocable to the wages that are excluded from the gross income of employees.

Wages of employees for which a work opportunity credit is claimed aren’t eligible for the credit.

Governmental employers aren’t eligible for the credit.

Deferred payment of employer payroll taxes

Deposits of the employer portion of payroll taxes due from March 28, 2020 through December 31, 2020 are deferred and payable 50% on December 31, 2021 and the balance on December 31, 2022.

Payments for one half of self-employment tax (the “employer” portion) for 2020 are also deferred and payable 50% on December 31, 2021 and the balance on December 31, 2022.

Employers that have a loan forgiven under Section 1106 of the CARES Act for a loan under Section 7(a)(36) of the Small Business Act aren’t eligible for deferring payment of employer payroll taxes.

Net operating loss deduction and carrybacks

The 80% of taxable income limitation for deducting net operating losses has retroactively been suspended for taxable years beginning after December 31, 2017 and before January 1, 2021.  For taxable years beginning after December 31, 2020, the 80% of taxable income limitation for deducting net operating losses will be restored.

For losses arising in a taxable year beginning after December 31, 2017 and before January 1, 2021, net operating losses may be carried back 5 taxable years. Previously, net operating loss carrybacks weren’t allowed for these years.

Taxpayers may elect to waive the carryback.  There is also a special election available to exclude carrybacks to one or more years that have income exclusion of offshore income under Internal Revenue Code Section 965.

Taxpayers may revoke a previous election to waive a net operating loss carryback by July 25, 2020.

Note many taxpayers should consider filing amended returns to claim net operating loss carrybacks from 2017, 2018. and 2019.

Excess business loss limitations suspended

The limitations on deductions for business losses in excess of business income have been suspended for taxable years beginning after December 31, 2017 and before January 1, 2021.

Since these losses will now be allowed, taxpayers who are entitled to them should file amended income tax returns to claim them.

Tax credit for prior year minimum tax liability of C corporations

The alternative minimum tax was repealed for C corporations by the Tax Cuts and Jobs Act of 2017.  Unused minimum tax credits were scheduled to be refundable with an annual 50% limitation for taxable years beginning in 2018, 2019, and 2020 until a 100% limitation would be applied for taxable years beginning in 2021.

Under the CARES Act, taxpayers may elect to claim a refundable credit for 100% of the balance for taxable years beginning in 2018 or 2019.

The election to claim the 100% limit for 2018 can be made using an application of tentative refund form (Form 1139.)  The form should be filed by December 31, 2020.  The IRS should issue the refund within 90 days after receiving the form.

Increased limit on deduction for business interest

Certain taxpayers that have more than $25 million of business income or are “tax shelters” are subject to a limitation for deducting business interest expenses.

Under the Tax Cuts and Jobs Act of 2017, the limit is the sum of (1) business interest income of the taxpayer for the tax year; (2) 30%  of the taxpayer’s adjusted taxable income for the year; and (3) floor plan financing interest of the taxpayer for tax year.

Under the CARES Act, the limitation of item (2) is increased to 50% for taxable years beginning in 2019 and 2020.

Technical correction for Qualified Improvement Property

Qualified improvement property is an improvement to an interior portion of a building that is nonresidential real property provided the improvement is placed in service after the date the building was first placed in service.  Improvements relating to the enlargement of a building, an elevator or escalator, or the internal structural framework of the building aren’t qualified improvement property.

This is the expanded definition of qualified improvement property adopted in the Tax Cuts and Jobs Act of 2017.

A drafting error in the Tax Cuts and Jobs Act of 2017 made the property subject to a 39 year depreciable life and not eligible for 100% bonus depreciation.

The CARES Act includes a technical correction defining qualified improvement property as 15 year property, qualifying for bonus depreciation.  This correction is retroactive to the date of enactment of the Tax Cuts and Jobs Act of 2017, which was December 20, 2017.

Taxpayers with commercial buildings that had qualified improvement property placed in service after 2017 should amend their 2017, 2018 and 2019 income tax returns to claim bonus depreciation for the year the property was placed in service.

Government loan guarantees for small businesses

In addition to the tax provisions discussed above and many other matters, the legislation includes a “Paycheck Protection Program.”  The Federal government will 100% guarantee SBA administered loans to businesses with not more than 500 employees.  Sole proprietors, independent contractors and other self-employed individuals are eligible for loans.  The covered loan period begins February 15, 2020 and ends on June 30, 2020.

The maximum loan amount is $10 million thorugh December 31, 2020.  The loan amount is based on payroll costs incurred by the business.

Uses of the loan include payroll support, such as employee salaries, paid sick or medical leave, insurance premiums and mortgage, rent, and utility payments.

Eligibility is based on whether a business was operational on February 15, 2020 and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.

The Act waives borrower and lender fees for particpaing in the Paycheck Protection Program, and waives collateral and personal guarantee requirements under the program.

The maximum interest rate for these loans is four percent.

No loan payments will be required for at least six months and not more than a year, and requires the SBA to issue guidance about the deferment process by April 27, 2020.

Although the stated maturity of the loans is 10 years, the principal amount of the loan is forgiven up to the amount of (1) payroll costs; (2) payments of interest on a covered mortgage obligation; (3) payments on any covered rent obligation; and (4) covered utility payments.

For details about how these changes affect your situation, consult with your tax advisor or write to me at mgray@taxtrimmers.com.

 

 

Final Qualified Opportunity Zone regulations increase benefits

The IRS issued the final regulations for Qualified Opportunity Zones, TD 9889, on December 20, 2019 and they were published in the Federal Register on January 13, 2020.  The final regulations are generally effective for taxable years beginning after March 13, 2020, but taxpayers may elect to apply them for taxable years beginning after December 31, 2017 (for most taxpayers, 2018 and 2019.)  If taxpayers decide to rely on proposed regulations previously issued by the IRS, they must totally follow the proposed regulations — no cherry picking!  Alternatively, if the final regulations are selected for 2018 and 2019, the taxpayer must solely rely on those.

Here’s a link to the regulations in the Federal Register: https://www.federalregister.gov/documents/2020/01/13/2019-27846/investing-in-qualified-opportunity-funds

The final regulations are generally more taxpayer-friendly than the proposed regulations, but there are some rules in the proposed regulations that are more favorable for some taxpayers.

My printout of the final regulations with the preamble is 543 pages.  I won’t explain them in detail here, but hit a few highlights.  If you are thinking of investing or have invested in a Qualified Opportunity Zone, I highly recommend that you work with a tax professional who has studied the rules.

When investing in a Qualified Opportunity Zone investment, due diligence is essential.  This is the type of investment that will attract fraudsters as organizers.  You won’t get the tax and investment benefits if the organizer steals your money.

Very briefly and over-simplified, the benefits of Qualified Opportunity Zone investments are: (1) Defer the taxation of capital gains until the earlier of an inclusion event (such as selling the investment) or December 31, 2026; (2) If the investment is held at least five years no later than December 31, 2026, 10% of the original gain becomes tax free; (3) If the investment is held at least seven years no later than December 31, 2026, 5% of the original gain becomes tax free; (4) If the investment is held more than 10 years, the appreciation of the investment becomes tax free.  Note that (1) in order to get ALL of the tax benefits, the investment must have been made by December 31, 2019, (2) the tax on at least 85% of the deferred capital gain must be paid for the tax year that includes December 31, 2026.

Remember that states might not conform to the Qualified Opportunity Zone rules.  For example, California hasn’t conformed at this time.

The Opportunity Zones are designated by the states.  You can likely locate them by searching online for “Qualified Opportunity Zones” and the state.  These investments are becoming available through investment advisors.  Alternatively, married couples can set up their own Qualified Opportunity Zone fund, or taxpayers otherwise can join together to make these investments.  (This is NOT a do-it-yourself project!  Only do it with professional help!)

Here are a few comparisons of the proposed and final regulations.

Under the proposed regulations, the taxpayer had to sell the investment (corporation, LLC or partnership interest) in order to get the 100% exclusion of appreciation within the fund after holding the investment (called a Qualified Opportunity Fund or QOF) for more than 10 years.  Under the final regulations, the exclusion can be claimed when the QOF sells a Qualified Opportunity Zone asset (for example, a building.)

Under the proposed regulations, a property that was abandoned or otherwise left vacant for 5 years or longer could be treated as “originally used” for the purposed of the Original Use Test.  Under the final regulations, the period is reduced to 3 years or longer, or only 1 year if the property was vacant before the designation of its location as a Qualified Opportunity Zone.

In order to defer the taxation of capital gains, the gain the taxpayer wishes to defer must be invested in the QOF within 180 days after the sale.

Under the proposed regulations, gains from the sale of Section 1231 assets (business assets) had to be netted for the taxable year and only Section 1231 gains in excess of losses could be deferred and invested in QOF.  Because the net gain couldn’t be determined until the end of the year, the time for the 180 day reinvestment started as of the end of the year of the sale.  Under the final regulations, gains from the sale of Section 1231 assets, without regard to Section 1231 losses, can be deferred and invested in a QOF.  The time for the 180 day reinvestment starts on the date of the sale.  When the gain becomes taxable, it will retain its status as a Section 1231 gain.

(Note that the proposed regulations and final regulations both provide that capital gains, not reduced by capital losses, are eligible for tax deferral by reinvesting them in a QOF.  The measuring date for 180 day reinvestment of capital gains is the date of the sale.)

For investors in a partnership or S corporation and for beneficiaries of estates and non-grantor trusts, called pass-through entities, the proposed regulations provided the ratable share of the capital gain from the passthrough entity could be reinvested in a QOF (1) within 180 days of the actual date of a sale or exchange by the passthrough entity, or (2) within 180 days after December 31 of the taxable year in with the gain was incurred.  Since it may be some time before the information is determined after the end of the taxable year, the final regulations add a third option, (3) within 180 days after the due date, WITHOUT EXTENSIONS, of the pass-through entity’s tax return for the taxable year in which the sale or exchange took place (generally, either March 15 or April 15 of the following year.)

The final regulations provide that taxpayers may elect to have the 180-day period begin on either the date an installment sale payment is received or on the last day of the taxable year in which the taxpayer would have recognized the gain under the installment method.  If the payment date is selected, the taxpayer must continue to follow that method in future years.  Also, installment sale gains from sales in years before January 1, 2018 are eligible for reinvestment in a QOF and tax deferral.

The final regulations clarify that nonresident aliens may defer the tax on capital gains that would otherwise be subject to U.S. tax by investing the gains in a QOF.

Under the proposed regulations, there was an inclusion event requiring the taxation of deferred gains for all of the shareholders if a QOF organized as an S corporation had a change of ownership exceeding 25% before the holding period requirements were met.  Under the final regulations, this requirement has been eliminated.  Only the shareholders who transfer their shares will have an inclusion event.

You can see from these changes that taxpayers will need to determine based on their own facts which set of regulations to choose.  As I write this, there is still time to defer federal income taxes by investing in a QOF for sales made late in 2019.

There are many additional provisions, including operating rules for Qualified Opportunity Zone investments, that I haven’t discussed here.  Once more, see your tax advisor for details.

 

Urgent news if you have a retirement account with a Conduit Trust named beneficiary

Legislation called the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, enacted December 20, 2019, renders any estate plan involving a Conduit Trust beneficiary of a big retirement account (including 401(k) accounts and IRAs) obsolete.

A provision of the Act repeals “stretch” payments over the life expectancy of most successor beneficiaries for inherited retirement accounts of decedents who die after December 31, 2019.  The maximum time for distributions is 10 years after the death of the decedent/plan participant.

What is a Conduit Trust?  The purpose of a Conduit Trust was to control a retirement account, usually with a minor beneficiary, and still qualify for distribution of the account over the beneficiary’s life expectancy, called stretch distributions.  In order to qualify, the account had to be disregarded for income tax reporting with respect to the retirement account distributions.  The way this was accomplished was to require that any retirement account distributions received by the trust be immediately distributed to the beneficiary.

Since life expectancy distributions are usually very small, a huge distribution would be payable to the beneficiary 10 years after the death of the account owner, probably subject to very high federal income tax rates and possibly subject to mismanagement by the beneficiary.

There are some exceptions to the new rule, including (1) the surviving spouse of the employee/participant, (2) a child who is under age 21, (3) certain disabled persons, (4) certain chronically ill persons, and (4) an individual not previously described who is not more than 10 years younger than the employee/participant.

When a child of the decedent reaches age 21, the balance of the account must be distributed within 10 years.

If a beneficiary of a retirement account inherited from a person deceased before 2020 is deceased after 2019, the 10 year limit applies to that person’s successor beneficiaries.

Since the Conduit Trust no longer provides a tax benefit, employees/participants with retirement accounts should consult with their attorney and tax consultant about eliminating the Conduit Trust as a beneficiary and making alternative estate plans for their retirement accounts.

Major federal retirement changes enacted, Kiddie tax change repealed

As part of the domestic spending bill, H.R. 1865, Further Consolidated Appropriations Act, 2020, enacted on December 20, 2019, major federal retirement changes were enacted in Division O, the Setting Every Community Up for Retirement Enhancement Act of 2019, nicknamed the SECURE Act.  As part of the SECURE Act, Congress also repealed changes to the Kiddie tax enacted in the Tax Cuts and Jobs Act of 2017.  Taxpayers may elect to amend their 2017 and 2018 individual income tax returns to use this Kiddie tax change.

Here are highlights.  Please consult with your retirement plan consultant or tax consultant for more details.

  • Effective for plan years beginning after December 31, 2020, the rules for multiple employer plans have been relaxed so that if one employer violates the qualification rules, the entire plan won’t be disqualified.  (The “one bad apple rule.”)
  • Effective for plan years beginning after December 31, 2019, the maximum default contribution for a plan with automatic enrollment is increased from 10% to 15%.
  • Effective for taxable years beginning after December 31, 2019, the tax credit for retirement plan startup cost for small employers is increased from the lesser of (1) $500 or (2) 50% of qualified startup costs to the greater of (1) $500 or (2) the lesser of (a) $250 times the number of nonhighly compensated employees of the employer who are eligible to participate in the plan or (b) $5,000.  The credit applies for the first three years of the adoption of the plan.  It’s also available for employers that convert an existing plan to an automatic enrollment design.
  • Effective for taxable years beginning after December 31, 2019, amounts includable in an individual’s income paid to aid the individual in pursuing graduate or postdoctoral study, such as a fellowship, stipend, or similar amount, is treated as compensation for the limitation on IRA contributions.
  • Effective for taxable years beginning after December 31, 2019, the prohibition of contributions to an IRA by an individual who has reached age 70 ½ has been repealed.  The excludable amount for direct distributions to a charity after age 70 ½ is reduced by any contributions to an IRA after age 70 ½.
  • Effective for plan loans made after December 20, 2019, amounts loaned from a plan using a credit card or similar arrangement will be treated as deemed plan distributions and not as loans.
  • Effective for plan years beginning after December 31, 2019, when a plan will no longer accept a lifetime income option, such as an annuity, as a plan investment, employees will be able to make direct transfers of the lifetime income investment to an IRA or another retirement account within the 90-day period ending on the date when the lifetime income investment is no longer accepted by the plan.
  • Effective for plan years beginning after December 31, 2020, employers are required to permit employees to make elective deferrals if the employee has worked at least 500 hours per year with the employer for three consecutive years and has met the age requirement (age 21) by the end of the three-year period.  Each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service for vesting purposes.  This (500 hour) requirement will not apply for collectively-bargained plans.   Employers may elect to exclude these employees for the nondiscrimination and top-heavy requirements.  Employer contributions won’t be required for these individuals.
  • Effective for distributions made after December 31, 2019, distributions of up to $5,000 per birth or adoption can be made free of the 10% early distributions penalty during the one-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.  (An eligible adoptee is any individual, other than a child of the taxpayer’s spouse, who has not reached age 18 or is physically or mentally incapable of self-support.)  Taxpayers must include the name, age, and taxpayer identification number of the child or adoptee on their tax return.  The distributions may be recontributed to an individuals eligible retirement plan, subject to certain requirements.
  • Effective for distributions after December 31, 2019, the age at which distributions are required to be made from an IRA or a qualified plan is increased from age 70 1/2 to age 72.  The age at which qualified charitable distributions of up to $100,000 per year from an IRA is unchanged at 70 1/2.
  • Retroactively effective for plan years beginning after December 31, 2017, the actuarial rules for defined benefit plans of privately-owned community newspapers are relaxed.  This is targeted relief benefiting this group.
  • Retroactively effective for defined contribution plan years beginning after December 31, 2015 and effective for IRA contributions after December 20, 2019 , difficulty of care payments that are excludable from gross income are treated as compensation for nondeductible IRA contribution limits.  These are payments by (1) a state or political subdivision of a state, or (2) a qualified foster care placement agency as compensation for providing additional care needed for qualified foster individuals.  The payments are provided when a qualified foster individual has a physical, mental or emotional disability for which the state has determined (1) there is a need for additional compensation to care for the individual; (2) The care is provided in the home of the foster care provider; and (3) the payments are designated by the payor as compensation for that purpose.
  • Effective for taxable years beginning after December 31, 2019, an employer may adopt a qualified retirement plan up to the extended due date of the employer’s federal income tax return and the plan can be retroactively effective for the taxable year.  Although employee contributions can’t be made after the year-end, employer contributions can be made up to the extended due date of the income tax return.  (This rule currently applies to SEP accounts.)
  • Effective for plan years beginning after December 31, 2021, the IRS is to issue procedures for employers who have similar individual account or defined contribution accounts to elect to file combined annual reports (Form 5500.)
  • The IRS is to issue model disclosures showing the estimated lifetime income based on the account balance of a plan participant, to be reported at least annually.  The IRS is also required to provide guidelines for how the income amount should be computed.
  • A fiduciary safe harbor is adopted so plan fiduciaries will satisfy the prudence requirement when selecting an insurer for a guaranteed retirement income (annuity) contract and will be protected from liability for losses that result to to participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the contract.  (A favorable provision for insurers, not so great for participants and beneficiaries.)
  • Effective on December 20, 2019, and electively retroactive to plan years beginning after December 31, 2013, the nondiscrimination rules are modified to protect older, longer service participation.  These rules are complex and beyond the scope of this explanation.  The rules will allow a closed or frozen plan to continue in existence.
  • Effective for distributions made after December 31, 2018, from Section 529 (educational savings) plans, registered apprenticeship expenses will be considered “qualified higher education expenses.”  Expenses for fees, books, supplies and equipment required for the designated beneficiary to participate in a registered apprenticeship program are qualified expenses for distributions from such a plan.
  • Effective for distributions made after December 31, 2018, up to $10,000 of qualified education loan repayments will be considered “qualified higher education expenses” for distributions from a Section 529 plan.  Student loan interest paid using distributions from a Section 529 plan won’t otherwise qualify for a tax deduction.
  • Effective for distributions made with respect to employees or plan participants who die after December 31, 2019, inherited retirement accounts must generally be distributed within 10 years after the employee or participant’s death.  There is an exception permitting “stretch” distributions based on life expectancy to (1) the surviving spouse of the employee/participant, (2) a child of the employee/participant who hasn’t reached majority, (3) certain disabled beneficiaries, (4) chronically ill beneficiaries, or (4) other beneficiaries who are not more than 10 years younger than the employee.  Once a child of the employee/participant reaches majority, the balance of the account must be distributed within 10 years after the date majority is reached.

The effective date for collective bargaining agreements and government plans will generally be for distributions with respect to employees or plan participants who die after December 31, 2021.

There is an exception for certain existing annuity contracts.

The ten-year distribution requirement also applies to successor beneficiaries of beneficiaries who inherited accounts before December 20, 2019.  (If an employee/participant was deceased during 2019, a surviving spouse might decide to disclaim IRA survivor benefits so that successor beneficiaries will be able to claim “stretch” distributions of benefits for which the election would otherwise be lost.)

Commenters have suggested  designating a charitable remainder trust as a beneficiary of a retirement account as a way to avoid the 10-year limit.  The plan distribution to the trust isn’t subject to current taxation.  Distributions are required to be made annually to the beneficiary(ies) of the CRT, which will probably carry taxable income.  Depending on how long the beneficiary(ies) live, some or all of the balance could go to a charity.  Seek tax and legal counsel when considering this alternative.

  • A provision of the Tax Cuts and Jobs Act of 2017 changed the Kiddie Tax that apples to the unearned income of certain individuals.  The rule applies to a child who (1) is required to file a tax return; (2) does not file a joint income tax return for the tax year; (3) the child’s investment income exceeds a threshold ($2,200 for 2019); (4) either of the child’s parents are alive at the end of the year; and (5) At the end of the tax year, the child is either (a) under age 18; (b) under age 19 and doesn’t provide more than half of his or her own support with earned income; or (c) under age 24, a full-time student, and does not provide more than half of his or her own support with earned income.  Under the Tax Cuts and Jobs Act, the child’s income tax is computed using the tax rate schedule that applies to estates and trusts.  This provision was causing a hardship, especially for survivors of military casualties.   Under the SECURE Act, this change is repealed, effective for tax years beginning after December 31, 2019.  Taxpayers may elect to retroactively apply the change for tax years 2018 and 2019.   This means children will generally be taxed on their unearned income at their parent’s marginal tax rate.  For 2019, the 37% marginal tax rate applies for single persons with taxable income over $510,300 and for estates and trusts with taxable income over $12,750.

IRS proposed regulations will keep more in retirement accounts

The IRS has issued proposed regulations relating to required minimum distributions from retirement accounts, including, 401(k), IRA and Roth IRA accounts.  (Proposed Regulations REG-132210-18, Proposed Regulations Section 1.401(a)(9)-9.)

The required minimum distribution is generally computed using a life expectancy table issued by the IRS, called the lifetime distribution table.  The life expectancy tables haven’t been updated for many years.  The proposed regulations include new life expectancy tables.

(If a taxpayer fails to take a required minimum distribution, the federal penalty is 50% of the undistributed amount.)

Since life expectancies have been increasing, required minimum distributions will be smaller using the proposed tables, potentially leaving larger balances to accumulate future earnings.  Bigger distributions can optionally be taken at the risk of exhausting the account before the employee or plan owner’s death.

The proposed regulations are proposed to be effective for retirement plan distributions for tax years beginning on or after January 1, 2021, provided they are adopted as final regulations by that date.

Required minimum distributions for a non-spouse beneficiary of a deceased employee or a deceased plan owner are based on the life expectancy determined using the Single Life Table of the beneficiary as of the date of death of the employee or plan owner, minus one for each subsequent year.  Under the proposed regulations, the beneficiary will be able to recompute his or her life expectancy as of the date of death of the employee or deceased plan owner using the new lifetime distribution table starting January 1, 2021.

 

Here are simple FREE ways to help defend your credit from identity theft

Almost all of us are victims of identity theft.

Have you ever been issued a new credit card number by your credit card company without requesting one?  That’s an indication your number was possibly acquired by computer hackers or there was unauthorized activity on the credit card.

Here are some FREE steps you can take to defend your credit from identity theft.

The first is to periodically get and review your credit report.  You can get it for free at annualcreditreport.com.  By limiting your request to one credit bureau, you can get a report quarterly.  The major credit bureaus are Equifax, Experian, TransUnion and Innovis.

A second step is to get a credit freeze.

In a mortgage update class yesterday, I learned about some smartphone apps for quick and easy control of access to your credit files. It’s controlled using an “on/off” switch. You can get them at the Apple Store or Google Play. They are free.

For Equifax, the app is Lock & Alert.

For Experian, the app is Identity Works.

For TransUnion, the app is MyTransunion.

There’s no need to get an “enhanced” version of an app for which you are charged. The basic “free” app is sufficient.

It’s also a good idea to request a credit freeze for your minor children.  Children are the most popular targets of identity thieves today, because “no one is looking” until the child is age 18.

Telephone numbers for requesting a credit freeze are:

  • Equifax 800-349-9960, option one (automated) or 888-298-0045 (attended.)
  • TransUnion 888-909-8872, Option 3
  • Experian 888-397-3742, Option 1, Option 2

You must request the credit freeze for each credit bureau.

You can also request free Fraud Alerts.  If you request them from one credit bureau, the others are also notified.

  • Equifax 800-525-6285
  • Experian 888-397-3742
  • TransUnion 800-680-7289

Be alert for “phishing” texts, telephone calls and emails trying to get access to your computer, smart phone or other information.  People are commonly getting telephone calls from the “IRS” and the “Social Security Administration” alerting them to collection actions or other matters.  These agencies do not call people.  They send letters.  Emails are also being “sent” by major institutions like Wells Fargo and Bank of America.  Don’t respond to them by clicking on anything in the email.  Look at your account online or call a representative using the telephone number on your credit card.

It’s a shame that identity thieves are making the internet and smart phones unsafe.

It’s prudent to protect yourself.  Anyone who has had a serious identity theft experience can tell you it’s miserable to clean it up.

 

Heterosexual couples under age 62 can now be registered domestic partners in California

Governor Newsom approved Senate Bill No. 30 on July 30, 2019.  The bill was authored by Senator Scott Weiner (Democrat state senator from San Francisco).  Under the new law, California’s Family Code is amended to allow heterosexual couples (a man and a woman) under age 62 to be registered domestic partners.

Before the change, only same-sex couples and heterosexual couples age 62 and greater could be registered domestic partners in California.

This change is important because registered domestic partners have essentially the same legal rights as married couples in California (including community property rights), and the relationship is not recognized as being married by the federal government.  THEREFORE, HETEROSEXUAL COUPLES WHO ARE CALIFORNIA REGISTERED DOMESTIC PARTNERS CAN AVOID THE FEDERAL INCOME TAX MARRIAGE PENALTY.

The federal marriage penalty means that a couple that files their income tax returns as married persons generally pays more income taxes than they would as unmarried persons.  The federal marriage penalty was increased under the Trump tax legislation, the Tax Cuts and Jobs Act of 2017.

Registered domestic partners are treated the same as married persons for California income tax reporting.

Be aware that registered domestic partners don’t qualify for some federal tax benefits that married couples do qualify for.  For example, gifts to a spouse who is a U.S. citizen qualifies for an unlimited marital deduction.  A bequest to a spouse who is a U.S. citizen also qualifies for an unlimited marital deduction.  The executor of a deceased spouse can elect on an estate tax return to give any unused lifetime exemption of the deceased spouse to a surviving spouse.  Only married persons are allowed to treat property settlements incident to a divorce as tax-free.

Heterosexual couples who are California residents and are planning to be married should consider being registered domestic partners, instead.

Heterosexual married couples who are California residents and who are paying a substantial federal marriage penalty should consider terminating their marriages and becoming registered domestic partners.  (Consult with your tax advisor to find out if you actually have a marriage penalty.)

I recommend consulting with a lawyer that specializes in family law and estate planning before making your decision.

(California S.B. 30, July 30, 2019.)

IRS issues more proposed regulations for Qualified Opportunity Funds

A great tax benefit enacted as part of the Tax Cuts and Jobs Act of 2017 is the Qualified Opportunity Fund (QOF).

Taxpayers who reinvest capital gains into one of these funds can defer federal income taxes on the reinvested capital gains, including Section 1231 gains from selling business assets that are taxable as capital gains, for up to eight years until the earlier of the date on which the qualified investment is sold or exchanged or December 31, 2026.  In addition, the additional gain relating to the appreciation of the Qualified Opportunity Fund may be tax free, provided an election is made and the investment is held for more than 10 years.

If the QOF is held at least 5 years, 10% of the reinvested deferred gain will be tax free.  If the QOF is held at least 7 years, an additional 5% of the reinvested deferred gain will be tax free.  These adjustments are accounted for as tax basis adjustments — adding the tax free amounts to the taxpayer’s cost of the investment in the QOF.

The IRS issued proposed regulations for these funds during October, 2018.  Now they have issued additional proposed regulations (REG-120186-18 to be published shortly in the Federal Register) and are asking for more feedback from the tax return preparation and consulting community.   Another public hearing is scheduled for July 9, 2019 at 10 a.m.

The new proposed regulations provide answers to many questions relating to Qualified Opportunity Funds, and are mostly favorable to taxpayers.  I can only cover a few highlights.  My printout of the regulations and preamble is about 168 pages.  Here are a few key points.

  1.  The ownership and operation (including leasing) of real estate is the active conduct of a trade or business.  A triple-net lease is not the active conduct of a trade or business.  This broad acceptance of real estate leases as a trade or business only applies for applying the rules for Qualified Opportunity Funds.

2.  Only net capital gains and net Section 1231 gains (from sales of business assets) that are taxed as capital gains qualify for deferral by reinvestment.  Since net Section 1231 losses are taxed as ordinary losses, the 180-day reinvestment period for net Section 1231 gains begins at the end of the taxable year when the sale of Section 1231 property was closed.

3.  If there is an “inclusion event”, any remaining reinvested deferred capital gains and Section 1231 gains will become taxable if the investment hasn’t already been held until December 31. 2026.

4.  If an S corporation that invests in a QOF has aggregate change of ownership of capital interests of more than 25%, there is an inclusion event.

5.  A conversion of an S corporation to a partnership or disregarded entity or a C corporation is an inclusion event.

6.  A taxpayer’s transfer of a qualifying investment by gift, whether outright or in trust, is an inclusion event.

7.  A taxpayer’s transfer of a qualifying investment to a revocable living trust (grantor trust) is not an inclusion event, because the trust is disregarded for income tax reporting and the taxpayer is considered to continue to own the investment.  The trust becoming irrevocable can be an inclusion event, but see item 8.

8.  The transfer of a qualifying investment to a beneficiary of an estate or trust as an inheritance is not an inclusion event.  Remaining reinvested deferred income is potentially income with respect of a decedent.  The beneficiary steps into the shoes of the decedent relating to when the income will be taxable.

9.  A corporate subsidiary that is a QOF is not eligible to be included in a consolidated income tax return.

10.  A corporate parent that is a QOF is eligible to be included in a consolidate income tax return.

11.  A taxpayer may invest amounts exceeding capital gains and Section 1231 gains that are eligible for deferral in a QOF.  The excess investment will be separately accounted for as a separate interest that is not eligible for QOF tax benefits.  (Any gain relating to that share will be taxable.)

12.  Distributions by QOFs can be inclusion events.  For example, if a QOF partnership or S corporation borrows money and distributes funds exceeding their tax basis to its partners (remember most QOF interests will start with a basis of zero, because there is no tax basis for the deferred gains that are reinvested in the fund), the distributions will be an inclusion event.  (Distributions of operating income should be handled carefully.  Remember you can have positive cash flow when you don’t have taxable income because of noncash deductions, like depreciation.)

13.  Special rules are provided for mergers, recapitalizations and reorganizations.  They are beyond the scope of this summary.  See your tax advisor.

14.  Used property leased tangible property that was previously not used for a depreciable purpose for at least five years can be eligible “original use” QEF property.

15.  The proposed regulations include fairly liberal “substantially all” definitions for various limitations.  They are beyond the scope of this summary.  See your tax advisor.

16.  Leases shouldn’t include prepayments for more than a year.

17.  The proposed regulations include valuation guidelines for tangible property when applying the test requiring 90% of the property of the QOF to be used in the Qualified Opportunity Zone.  The QOF may either use the value for a qualified (audited) financial statement or cost and present value of lease payments as of the inception of the lease.  The property doesn’t have to be revalued each year.

18.  QOFs are required to annually pass a 50% of gross receipts test.  A least 50% of the QOF’s gross income must be earned in a Qualified Opportunity Zone.  Under the regulations, the gross receipts aren’t tested based on where the customer is located, but on where the work is done to produce the products or services.  That means sales from reselling products produced overseas won’t be qualified income.  Just having a post office box located in a Qualified Opportunity Zone doesn’t mean the business is considered to be located there.

19.  Unimproved land won’t be considered qualifying property unless plans are in place to substantially improve the land within 30 months.

The IRS says they will be issuing more proposed regulations for QOFs soon.

These proposed regulations are critically important for taxpayers to realize the tax benefits that they are counting on when making investments in QOFs.

Lessons From Our Fire Recovery Experience

Our family home was destroyed in a fire two days before Thanksgiving, 2015.  On November 29, 2018, we sent the final payment to the fire restoration company, three years after the destruction of our home.  (The restoration was finished during September, 2018 and we received the final payment from our home insurance claim late November, 2018.)  I thought readers might be interested in what our experience was like and the lessons that we learned that might help other victims of fires and to prepare for the possiblility of a fire or other disaster.

First, we had enough insurance to cover most of the cost of restoring our home and personal property.  The process of getting those benefits was rather horrific, but we got through it without the help of a public adjuster.  I’m not certain that “everyman” could.  Since I am a CPA with business management experience and my wife, Janet, understands home design, we were able to manage the process with a lot of help.

What is a public adjuster?  A public adjuster is a company that helps people who have suffered disaster losses to get the maximum recovery from their insurance company.  For this service, they receive a hefty fee.  I understand it’s 5 – 10% of the total recovery.  For some people, this is a worthwhile investment.  We were able to get the policy limits for our recovery, so we were fortunate to get through the process without a public adjuster.

It’s probably a good idea to review your policy benefits with your property insurance agent to really understand your coverage.  I understand some people have lost their coverage after making a claim like this.  So far, our property insurance company is continuing ours.

As I watched our home burn, a representative from a fire recovery company put his arm over my shoulder and reassured me, “Mike, I’m going to rebuild a beautiful new home for you.”

I asked him, “Can you have the rebuild done by next Christmas?”  He reassured me that he thought he could.  I might not have given them the job if I knew in advance that it would take almost three years!

We spent the night of the fire sleeping in my daughter’s front room.  It was one of the most miserable and uncomfortable nights of my life.  The next week or so our insurance company paid for our lodging at a Residence Inn, which was great.  The Residence Inn provided breakfast and a Happy Hour buffet on several nights, so we didn’t have to go out for dinner on most nights or for breakfast.

Our homeowner’s insurance policy provided living accomodations replacement for two years, so we shortly moved to a furnished rental home located close to my daughter’s family.  My granddaughters thought it was great that Grandma could walk and pick them up from school.  The insurance also covered additional living expenses, including some meals and additional mileage to commute to work compared to our regular residence, and duplicate expenses for utilities and garbage.

It’s very important to keep good records during this process to identify duplicate living expenses, including the utilities costs for both your regular residence and the rental residence, to get reimbursements for duplicate expenses.  (In Santa Clara County, garbage  pickup is included on the real estate tax bill.)

When our two years was over, the insurance company informed us they would no longer cover the rental for the home.  The rebuilding of our home was only about half done.  There wasn’t even a front door and no furnace for heat!  We moved into our unfinished home and slept on the (unfinished) floor using inflatable mattresses.  There was one working sink and one working toilet.  We lived in our home while the restoration company finished rebuilding it.

Your property insurance agent does not handle your fire loss claim.  The insurance company assigns adjusters to do that.  We had separate adjusters for the building and for personal property (furniture, clothing, etc.)  The adjuster might be an employee of the insurance company of an independent contractor.  A big irritation in this process is the insurance company routinely rotates adjusters off cases every few months.  This means your file is neglected for some time and you have to get another person up to speed.  We kept in touch with our insurance agent to act as our advocate with the company to keep the momentum going processing our claim and reduce the rotation of adjusters on our case.

The initial two people that we worked with at our restoration company were actually very helpful.  One of them had previous experience as an adjuster for a property insurance company.  They gave us some coaching about the process and how to deal with our property insurance company.  The other one actually wrote some software for us to make it easier to make the list of personal property lost in the fire.  This was enormously helpful.  With his software, we could look up items on the internet to give references for replacement costs and where they came from.  These people left the company, one about a year after our loss when we made the initial personal property loss report and the other a few months before our house rebuild was finished, requiring us to get another representative up to speed to finish the job.  This created more inconvenience because he wasn’t familiar with our case.

Recreating our personal property list was a huge job.  It required listing in detail all of the items in each room of the house.  I have a pretty good memory and can summon a picture of what was where.  Not everyone is so fortunate.  My wife, Janet, walked through stores looking at the shelves for items that we lost, taking picture of items and their prices with her smart phone.  Although the personal property adjusters said to focus on the high value items, small value items really add up.  Looking back, it would have been great to have photos or videos as a tour of the house showing everything.  We had CDs of our photos that weren’t kept outside the house in a safe deposit box, so they burned.  Now many people are putting photos and documents “in the cloud”.  A good idea!

Again, be sure to keep your receipts for replacement items, including clothing, towels, razors, toothbrushes, toothpaste, etc.  You also have to list in detail what the receipts are for.  (For example, state if out bought the Phantom of the Opera DVD.)  You might need to attach your receipt to a separate piece of paper with a list of items purchased with the amounts.

Initially, our policy paid for the depreciated value of items.  It paid for replacement cost when we provided copies of receipts and the items were purchased within two years after the fire.  Those receipts are the documentation of the cost of the replacement items.  They can also be important income tax records.  According to the rules for involuntary conversions (such as a fire), if there is any gain from the insurance recovery, it isn’t taxable provided the item is replaced for at least the amount recovered.

Since the rebuild of our home wasn’t done in two years, we ordered some furniture with delayed delivery and put appliances (dishwasher, refrigerator, washing machine, dryer, microwave oven, stove, trash compacter) in the garage.  We couldn’t delay the delivery of some furniture that we bought at a consignment store (a great source for antique/wood furniture!) so we just had them put it in our unfinished home.  As we approached the two year date, our personal property adjuster made an extra effort to come to our home and help us assemble the information so that we reached our policy limit.

We had to replace many documents, like vehicle pink slips, passports, social security cards and birth certificates.  The cost of replacing these items were included in our insurance claim.

Rebuilding our home was like a slapstick comedy.  There were many miscommunications leading to many false starts.

The restoration company was able to make an accurate model of our home, using laser equipment.  Too bad the architect ignored the model.  You’d think the plans might be on file with the City of San Jose.  Nobody got them.  Some of our neighbors have homes with the same exterior and floor plan as ours.  Nobody bothered to check them out.

There were several errors in the plans prepared by the architect.  The architect was not located near our home.  Each time the plans were changed, they had to be approved by the City of San Jose building department.  In some cases, it took months to get the approval for the changes.  Building would usually stop when waiting for the approval.  Finally, we got to the point of harassing our restoration company to get changes processed more quickly and to expedite getting approval by the City of San Jose.

Some examples of the plan corrections:

  • We have an open staircase, which gives a very open look when entering the house. The architect’s plan had an enclosed staircase.
  • We have a family room – kitchen, which is one large open room. The architect’s plan had a wall between the family room and kitchen.
  • We have vaulted ceilings in the master bedroom and the front room. The architect’s plan didn’t have vaulted ceilings.  (This required a major change in the “truss” plans for our roof and changes in the ventilation for the HVAC for the house.)
  • The architect’s plan omitted the linen cabinet for the upstairs hallway.
  • The architect’s plan didn’t include the furnace or air conditioning(!)

The architect and the builder didn’t know which codes applied for some items, such as the insulation for the vaulted ceilings, and how the frame for the house is attached to the foundation.  Items like this required rework and multiple inspections.

City inspections also became an issue.  Waiting between inspections resulted in more delays waiting to continue building.  Finally, I called my city council representative and got the direct telephone number for the inspector and was able to expedite having inspections done.

The builder was in a fog about ordering many items.  Janet and I regularly had to go to the hardware store to keep things moving by buying ceiling lamps, faucets, sinks, toilets, cabinet handles, fireplace mantle, etc.

We had turnover of the construction foreman for the restoration company.  The first foreman was great, but left after only a few weeks on the job.  The second foreman was congenial, but didn’t seem to actively manage the job.  There were several items that he said he would take care of, such as ordering floor tile, getting the gas fireplace, and the mantle for the fireplace, that we ended up taking care of ourselves.  More delays!

If we didn’t manage the reconstruction of our home and keep pressing to get the job done, it might have taken two more years to finish it!

I did quite a bit of research relating to the tax rules for an involuntary conversion (replacement after a disaster.)  I recommend that you consult with a tax expert if your home is destroyed by a fire.  One thing to be aware of is that you apply the exclusion for sale of a residence, $250,000 for an individual or $500,000 for a married couple, before applying the exclusion for replacement property, so you get a basis increase from the involuntary conversion of a principal residence.

In summary, you can’t passively rely on others to take care of the restoration of your home, replacing your property and getting the maximum insurance recovery.  You have to pay attention and be actively involved in the entire process, including watching insurance deadlines.  If someone else says they’ll handle it for you, be prepared to pay a hefty fee and be prepared to be disappointed and step in when necessary.

A Social Security benefit when both spouses were at least age 62 on 1/1/2016

Under a grandfather rule, married couples who were both at least age 62 on January 1, 2016 are eligible for a procedure called a “restricted application” to increase their Social Security benefits.  The spouses must also meet other qualifications for spousal benefits to use the procedure, which I’m not going to explain here.

The Social Security benefit increases by 8% each year after the individual reaches “full retirement age” until reaching age 70, usually for a total potential 32% increase.  (For individuals born from 1945 to 1954, full retirement age is age 66.)

If you are trying to provide the highest possible survivor benefit, you will usually want to defer applying for benefits for the higher-earning spouse until age 70.

Lower-earning spouses can always apply for worker benefits under their own account and later apply for potentially higher spousal benefits after their higher-earning spouses apply for benefits under their own account.

When a restricted application is made, the higher-earning spouse initially applies only for spousal benefits under the lower-earning spouse’s account.  Retirement credits continue to accrue on the higher-earning spouse’s account and that spouse applies for worker benefits on his or her own account at age 70.

For example, John was born on April 8, 1953.  His full retirement age benefit at age 66 is $2,500 per month.  Jill was born on December 30, 1952.  Her full retirement age benefit at age 66 is $800 per month.

Jill applies for worker benefits at age 66 on December 30, 2018.  Her benefit is $800 per month.

John makes a restricted application for spousal benefits at age 66 on April 8, 2019, for a benefit of $400 per month (disregarding cost of living adjustments for all computations.)

John applies for worker benefits on his own account at age 70 on April 8, 2023, for a benefit of $3,300 per month.

Jill applies for spousal benefits during April 2023 for a benefit of $1,250 per month (one-half of John’s primary insurance amount of $2,500).

You can’t apply for spousal benefits until your spouse applies for worker benefits.

When the low-income spouse applies for spousal benefits after reaching full retirement age, that spouse receives one-half of the high-income spouse’s primary insurance amount (the worker benefit that spouse would receive at full retirement age without any increases for deferred retirement credits), even if the high-income spouse hasn’t reached full retirement age, and even when the high-income spouse applies for benefits later than full retirement age.

This explanation only covers the highlights.  You might want to go over your details with a financial planner who understands Social Security benefit planning.

Also, be extra careful when making a restricted application for benefits to avoid accidentally making a regular application.

I hope this information is helpful for you or somebody that you know.  Feel free to share a link for this blog post.

Tax and financial advice from the Silicon Valley expert.