Tax and financial advice from the Silicon Valley expert.

Ideas and information about planning for your family’s financial future

Big Brother wants to watch EVEN MORE!

Under the Notice of Proposed Rulemaking, transfers to a legal entity, including a TRUST, corporation, partnership, limited partnership or limited liability company, of residential real estate of up to four units and unimproved land zoned for occupancy by one to four families that don't involve financing through a financial institution would have to be reported on a Real Estate Report to FinCEN within 30 days or a sale or transfer, and copies kept by the reporting person and other parties for five years.

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Age 72 during 2023? You might get an extra IRA rollover

If you received a scheduled required minimum distribution from an IRA because you reached age 72 this year, the IRS just gave you a "mulligan". (This relief also applies for a surviving spouse.) The IRS has announced you may roll the distribution back to the account no later than September 30, 2023.

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Consider filing a protective claim for Obamacare taxes

The U.S. Supreme Court has agreed to hear California v. Texas (U.S. Supreme Court Docket 19-840.)  This case challenges the constitutionality of the Affordable Care Act, nicknamed Obamacare.

If the Supreme Court rules the Affordable Care Act to be unconstitutional, taxes and penalties enacted as part of the Act could be eliminated and taxpayers could apply for refunds of those taxes.  These include an extra 0.9% Medicare tax and the 3.8% net investment income tax.

Consider sending a protective claim to the IRS by July 15, 2020 for the tax year 2016.  Spidell Publishing has posted a suggested simple form for a claim.  Here is a URL for the form.  http://www.mmsend63.com/link.cfm?r=4MGaSk-8do9OSq5rWJozRA~~&pe=MLxUYHWRMJTah2hlVsRhufQV3c6p4SCiez5_l6NGi1-_VLwkya4_xaxcLOOmNGM5Qkg_z_cN4pc5N38k-Y3xTA~~&t=QIJYj7V5qtg-xGkCJ-dZlw~~

You might remember the Supreme Court previously upheld the Affordable Care Act as constitutional during 2012 in National Federation of Independent Businesses v. Sebelius, because the penalties enacted in that Act to enforce the Mandate that everyone have medical insurance were considered to be taxes and Congress has the power to levy taxes under the U.S. Constitution.

One of the provisions of the Tax Cuts and Jobs Act of 2017 was to change the penalty rate to zero.

The Fifth Circuit Court of Appeals ruled on December 18, 2019 that since the “tax” for the Mandate no longer applies, the Mandate is unconstitutional, and so is the Affordable Care Act.

California and other states are contesting the decision of the Fifth Circuit Circuit Court of Appeals.

This is a last-minute development.  Personally, I question whether the U.S. Supreme Court would retroactively strike down the Affordable Care Act when they previously upheld it and the penalty “tax” applied before 2019.  But I could be wrong.  If you don’t file a protective claim and the U.S. Supreme Court rules Obamacare was unconstitutional during 2016, you won’t be able to recover the taxes for that year.

Tax return preparers are probably already occupied with finishing 2019 income tax returns and extensions for the July 15, 2020 deadline.

If you paid these taxes and can get through to your tax advisor, discuss this matter with her or him.

IRS issue rules for coronavirus-related retirement plan distributions

The CARES Act, enacted on March 27, 2020, includes relief measures relating to retirement account distributions, including waiving the penalties for certain early distributions from retirement accounts, recontributions of distributions, deferring income taxation of distributions, and increasing the limits for plan loans.

The IRS has issued details of how the relief measures will work in Notice 2020-50.  Here’s a URL for the Notice. https://www.irs.gov/pub/irs-drop/n-20-50.pdf

Qualified individual

Here are the requirements for an individual who would otherwise be subject to the early distribution penalty (usually under age 59 1/2) to qualify for the relief:

  • Diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • Spouse or dependent diagnosed with COVID-19; OR
  • Who experiences adverse financial consequences as a result of: (1) the individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19; (2) the individual being unable to work due to lack of childcare due to COVID-19, or (3) closing or reducing hours of a business owned or operated by the individual due to COVID-19.

The IRS also extends relief to an individual who experiences adverse financial consequences as a result of:

  • the individual having a reduction in pay or self-employment income due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
  • the individual’s spouse or a member of the individual’s household (shares the same principal residence) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
  • closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

Coronavirus-related distribution

A coronavirus-related distribution is any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020 to a qualified individual.  An individual can receive a maximum of $100,000 of coronavirus-related distributions.  Any distributions beyond the $100,000 limit won’t qualify for relief.

The distribution can be used for any purpose.

A beneficiary of an inherited retirement account doesn’t qualify for relief, because beneficiaries aren’t subject to the early distribution penalty.

Certification to plan administrator

The Notice includes a sample certification to the plan administrator that a distribution qualifies as a coronavirus-related distribution.  The plan administrator can rely on the certification unless the administrator is aware of facts to the contrary, such as more than $100,000 of distributions have been received by the plan participant.

The certification is for the plan administrator.  The individual isn’t bound by the certification for income tax reporting.

Employer plans must be amended to make a qualifying distribution

Employer plans can only make these distributions if they are permitted by the plan document.  The plan document will probably have to be amended to be able to make them.  For most plans, the plan amendment must be made by the last day of the first plan year beginning on or after January 1, 2022.  For government plans, the plan amendment must be made by the last day of the first plan year beginning on or after January 1, 2024.

Some plans, such as annuity type retirement plans, don’t qualify to make early distributions.  401(k) plans usually can qualify.  See your tax advisor for details.

Information reporting

The payor will report the distribution on Form 1099-R.  The distribution must be reported even if the qualified individual recontributes the coronavirus-rleated distribution to the same eligible retirement account in the same year.  The payor may use either distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099R.

Accepting recontribution of coronavirus-related distributions

Retirement plans aren’t required to accept recontributions of coronavirus-related distributions.  It’s optional.  The plan will have to be amended to accept them.

Income inclusion for coronavirus-related distributions

Individuals may elect to report  coronavirus distributions (1) for the year of distribution or (2) ratably over three years, starting with the year of distribution.  The election can’t be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of distribution.  The individual must treat all of the qualifying distributions for the year using the same method.

Reporting recontributions of coronavirus-related distributions

A qualified individual is permitted at any time in the 3-year period beginning the day after the date of a coronavirus-related distribution to recontribute any portion of the distribution, up to the total amount, to an eligible retirement plan.  The distribution is not considered a rollover contribution, so multiple distributions during 2020 can qualify.

If a qualified individual elects to report all of the income for 2020, the recontribution will reduce the amount of the coronavirus-related distribution included in gross income for 2020.  The recontribution is reported on Form 8915-E.  If the recontribution is made after the due date, including extensions, for filing the income tax return for the year for distribution, the income is reduced on an amended income tax return for 2020, which will include Form 8915-E.

If a qualified individual elects to report the income over three years and the individual recontributes any portion of the coronavirus-related distribution to an eligible retirement plan by the due date including extensions, for a tax year in the three-year period, the amount of the recontribution will first be applied to reduce the taxable amount for that year.  The individual may elect to carryover or carryback any excess amount.

For example, Mary received a $30,000 coronavirus distribution during 2020.  She elected to report the income over three years.  Mary files an extension for her 2021 income tax return, extending the due date to August 15, 2022.  Mary recontributes $15,000 to an eligible retirement plan on August 5, 2022.  Mary’s income from the coronavirus distribution for 2021 is reduced to zero.  Mary may elect to reduce her income from the coronavirus distribution for either 2020 or 2022 by the excess $5,000 ($15,000 – $10,000).  A reduction for 2020 would be reported on an amended income tax return.  The reductions are reported using Form 8915-E.

Special rule for year of death

If an individual dies before the full taxable amount of the coronavirus distribution has been included in gross income, the remainder must be included in gross income for the taxable year that includes the date of the individual’s death.

Plan loans

The CARES Act includes relief for employer retirement plan loans.  (California’s income tax rules don’t conform to this change.)

  • The allowable loans from an employer retirement account is increased from $50,000 to $100,000, and the rule that limits the aggregate amount of loans to 50% of the employee’s vested accrued benefit is increased to 100% of the employee’s vested accrued benefit.  The plan document must be amended to permit this change.
  • If a qualified individual had an outstanding loan from a qualified employer plan on or after March 27, 2020, any repayment for the loan due during the period from March 27, 2020 through December 31, 2020 is delayed for one year.  The term of the loan may be extended by up to one year.  Any subsequent repayments are adjusted to reflect the delay and the period of delay is disregarded in determining the 5-year period and term of the loan.  Unpaid interest is added to the loan.  This rule isn’t mandatory.  The employer is permitted to choose to allow this delay in loan payments.

The administrator of a qualified employer plan may rely on an individual’s certification that the individual satisfies the conditions as a qualified individual.

Nonqualified deferred compensation plans

The IRS stated that the coronavirus crisis qualifies as an unforeseen emergency, qualifying for a cancellation of a service-provider’s deferral election relating to a nonqualified deferred compensation plan.  The deferral election must be cancelled, not merely postponed or otherwise delayed.

See your tax advisor

There are many special tax rules that have been enacted for 2020.  This is one year that you can really benefit from meeting with a tax advisor for tax planning.

Tax and financial advice from the Silicon Valley expert.