Tax and financial advice from the Silicon Valley expert.

Tax tips and developments relating to individuals

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.

For Seniors Only – IRS allows “undoing” an unneeded 2020 “required” retirement plan distribution

The CARES Act eliminated required minimum distributions for 2020.  (Distributions are still required for a defined benefit account, which is basically an employer-provided retirement annuity.)

As a general rule, you have to start taking distributions from a retirement account, like an IRA or a 401(k), when you reach age 72 (as amended by the SECURE Act.)  The required minimum distribution is computed based on your life expectancy each year.  This rule has been waived by the CARES Act for 2020.

If you don’t need the money for living expenses, it’s best not to  take money out of a retirement account, so that it can continue to enjoy tax-deferred growth.  (If you do need the money for living expenses, this discussion doesn’t apply to you.  There’s no requirement to roll over what would otherwise be a required minimum distribution.)

Without this exception for 2020, distributions that are required minimum distributions wouldn’t be eligible for a rollover to an IRA or other qualified retirement account.

The elimination of required minimum distributions created a problem for some taxpayers.  Taxpayers usually can only roll over one distribution in a 12-month period.  Many retired persons take their distributions in monthly installments to make it easier for them to budget funding their expenditures.

In addition, rollovers usually must be completed within 60 days.  The IRS previously extended the due date to complete a rollover for a distribution made during the period from February 1, 2020 to May 16, 2020 to July 15, 2020 with Notice 2020-23.

Now the IRS has announced more relief for retirement account distributions received during 2020 that would otherwise be required minimum distributions in Notice 2020-51.  Here is a URL for the Notice. https://www.irs.gov/pub/irs-drop/n-20-51.pdf

  1. The due date to complete a rollover of any distribution that would otherwise be a required minimum distribution during 2020 is extended to be not before August 31, 2020.
  2. Any distribution that would otherwise be a required minimum distribution paid during 2020 is not subject to the one rollover per 12-month period limitation.  In other words, if multiple payments have been received that would otherwise be required minimum distributions, the total of all of the payments can be rolled over.
  3. The IRS clarified that a plan participant with a required beginning date of April 1, 2021 (became age 72 during 2020), is not required to take an initial distribution on that date.  Unless there is a later tax law change, the plan participant will still have to receive a required minimum distribution for 2021 during 2021.  Any distributions made during 2021 will first be applied as required minimum distributions and will ineligible for a rollover.
  4. Even though no distribution is required when the required beginning date is April 1, 2020 or April 1, 2021, those dates will still be the required beginning date for every other purpose, such as determining how distributions must be paid after the death of the participant.

IRAs don’t have to be amended in order to receive a rollover contribution of required minimum distributions.  Employer-provided defined contribution retirement plans (like 401(k)s) do have to be amended to accept these rollover contributions.  Notice 2020-51 includes a sample amendment for a defined contributions plan to accept these contributions.

Notice 2020-51 clarifies that payments that are part of a series of substantially equal periodic payments under the “RMD method” (commenced before age 59 1/2) aren’t considered “required minimum distributions” for the 2020 waiver.  If the payments are stopped in 2020 (other than because of death or disability) prior to age 59 1/2 (or prior to 5 years from the date of the first payment), the cessation of the payments is a modification so that ALL of the payments made under the series are subject to an early distribution recapture penalty tax.

If you already received what would normally be required minimum distributions during 2020, consider rolling them over by August 31, 2020.

If you haven’t received what would normally be a required minimum distribution but have one scheduled for later this year, consider notifying the plan administrator to cancel the distribution.

Also consider that Roth conversions aren’t limited to one per year.  Considering the stock market has been soft, 2020 may be a good year to make one or more Roth conversions.

If you have questions about these matters or need help with your tax and financial planning, consult with your tax advisor and financial advisor.  You can also write to me at mgray@taxtrimmers.com.

 

 

 

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.

SBA issues updated PPP loan rules and forms

The SBA has issued new forms and updated its Paycheck Protection Program loan “final rules” for the Paycheck Protection Program Flexibility Act of 2020, enacted on June 5, 2020.

One of the forms is a new one, simplified Form 3805EZ.

Here are URLs for the final rules and forms.

https://home.treasury.gov/system/files/136/PPP-IFR–Revisions-to-the-Third-and-Sixth-Interim-Final-Rules.pdf
https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf
https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Instructions_1_0.pdf
https://home.treasury.gov/system/files/136/PPP-Forgiveness-Application-3508EZ.pdf
https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Form-EZ-Instructions.pdf

Under the Act, the “covered period” was extended from the eight-week period beginning on the date of the origination of a covered loan to 24 weeks.  Borrowers that received PPP loans before June 5, 2020 may elect to use the original eight-week period.

The forgiveness requirement to use at least 75% of loan proceeds for payroll costs was reduced to 60%.

The forms reflect that a pro-rated forgiveness can apply if there is a reduction of the employee count by the end of the covered period.

The maximum payroll costs, including salary, wages and tips, eligible for the forgiveness for an employee is $46,154 with the 24-week covered period and $15,385 with the eight-week covered period.

The owner compensation replacement is calculated based on 2019 net profit.  The amounts are 2.5/12 of 2019 net profit, up to $20,833, for a 24-week covered period and 8/52 of 2019 net profit, up to $15,385, for an eight-week covered period.  Amounts for which a credit is claimed for qualified sick leave equivalent amount and qualified family leave equivalent amount aren’t eligible for forgiveness.

Remember up to 25% of loan proceeds used to pay otherwise tax deductible interest on mortgage obligations or personal property incurred before February 15, 2020, otherwise tax deductible rent payments on lease agreements in force before February 15, 2020 and otherwise tax deductible utility payments under service agreements dated before February 15, 2020 is eligible for forgiveness under the eight-week covered period scenario.  Up to 40% of loan proceeds used to pay the same expenses is eligible for forgiveness under the 24-week covered period scenario.

Many more borrowers should be able to qualify for exclusion of their PPP loans under the new rules.

California NOL suspension and $800 business tax waiver for new businesses

The California legislature has passed budget legislation, AB 85, and sent it to Governor Newsom, who is expected to approve it.

Notably, there were no provisions conforming California tax law to the CARES Act relief measures adopted by the federal government earlier this year.

Net operating loss deductions won’t be allowed on California income (including corporate franchise) tax returns for 2020-2022 tax years for businesses with business income, or modified adjusted gross income of $1 million or more.  The term for which net operating losses that could have been deducted in those years is extended by one year for losses incurred in taxable years years beginning on or after January 1, 2021 and before January 1, 2022, by two years for losses incurred in taxable years beginning on or after January 1, 2020  and before January 1, 2021, and by three years for losses incurred in taxable years beginning before January 1, 2020.

The $800 “privilege tax” for corporations, limited partnerships and limited liability companies “doing business” in California is waived for new companies organized (registered with the California Secretary of State) on or after January 1, 20121 and before January 1, 2024.

Business credits will be limited to $5 million for the 2020 – 2022 tax years.  The carryover period for the credits is extended to compensate for the years the limitation applies.

The exemption for sales tax for baby diapers and for menstrual hygiene products, which was scheduled to expire on January 1, 2022 is extended to June 30, 2023.

New sales tax collection and reporting rules will apply for auto dealers, other than new car dealers, effective January 1, 2021.  The details are beyond the scope of this summary.  See your tax advisor for details.

The maximum monthly penalty for not having mandated health insurance for a responsible person with an applicable household size of five or more individuals is capped at the penalty for five individuals.

 

 

 

IRS explains some CARES Act retirement plan provisions

The IRS has posted Frequently Asked Questions relating to CARES Act Retirement Plan Provisions.

According to Q & A 7, a taxpayer who elects to repay a COVID-19 related distribution would pay the tax on the three-year schedule and then amend the tax returns and request refunds when the distribution is repaid.

According to Q & A 9, employers may optionally amend their retirement plans to permit loans and distributions permitted under the CARES Act, so some employers might not allow the increased loans and distributions.

Here is a URL for the FAQs.  https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

Some SSI and VA recipients must register by May 5 to receive bigger Economic Impact Payment

The IRS says Supplemental Security Income (SSI) and Department of Veterans Affairs (VA) beneficiaries must act by Tuesday, May 5 if they didn’t file a federal income tax return for 2018 or 2019 and they have qualifying dependents to increase their Economic Impact Payment.

$500 is added to the payment for a child that would qualify for the child tax credit.

Just go to IRS.gov and click “Non-Filers: Enter Payment Information Here.”

(IR-2020-86 https://www.irs.gov/newsroom/va-ssi-recipients-with-eligible-children-need-to-act-by-tuesday-may-5-to-quickly-add-money-to-their-automatic-economic-impact-payment-plus-500-push-continues)

Expenses paid with forgiven PPP loans aren’t tax deductible

The IRS has issued guidance relating to the tax deductibility of expenses paid with a Paycheck Protection Loan that is forgiven.  (Notice 2020-32.  https://www.irs.gov/pub/irs-drop/n-20-32.pdf)

According to the CARES Act, the forgiveness of indebtedness is not taxable income.  (CARES Act Section 1106(i).)

The CARES Act doesn’t specify whether the expenses are tax deductible.

A Paycheck Protection Loan is eligible for forgiveness when the proceeds are used for the following expenses during the 8-week “covered period” beginning on the the loan’s origination date (CARES Act Section 1106(b)):

  1. Payroll costs
  2. A payment of interest on a covered mortgage obligation
  3. A payment on a covered rent obligation
  4. A covered utility payment

The IRS reminds taxpayers that, according to Internal Revenue Code Section 265(a)(1), no deduction is allowed for any item that is allocable to tax-exempt income.

To receive tax-exempt income from the federal government and to be allowed a tax deduction paid using the income would be a double benefit.

Taxpayers and their tax return preparers should note that these items won’t be tax-deductible on their 2020 income tax returns.

 

Joint Committee on Taxation explains Tax Provisions in CARES Act

The Joint Committee on Taxation has issued a description of the tax provisions in the CARES Act.

Here is a URL to download the report.  https://www.jct.gov/publications.html?func=startdown&id=5256

Due date to complete some IRA rollovers is extended

Notice 2020-23 includes an extension to July 15, 2020 of a host of administrative acts.

“The Secretary of the Treasury has also determined that any person performing a time-sensitive action listed in either § 301.7508A-1(c)(1)(iv)-(vi) of the Procedure and Administrative Regulations or Revenue Procedure 2018-58, 2018-50 IRB 990 (December 10, 2018) which is due to be performed on or after April 1, 2020 and before July 15, 2020 (Specified Time-Sensitive Action), is an Affected Taxpayer.”

Two of the specified acts include:

(1) An eligible rollover distribution that may be rolled over to an eligible retirement plan, including an IRA no later than the 60th day following the day the distribute received the distributed property (Rev. Proc. 2018-58, Section 8, item 23), and

(2) An individual with excess deferrals for a taxable year must notify a plan not later than March 1 following the taxable year that excess deferrals have been contributed to the plan for the taxable year.  A distribution of excess deferrals identified by the individual, plus income attributable to the excess through the end of the taxable year, must be made no later than the first taxable year of the excess (Rev. Proc. 2018-58, Section 8, item 25.)

Therefore, rollovers of IRA distributions made after January 31, 2020 to May 16, 2020 may be completed by July 15, 2020.  (Watch for more IRS announcements relating to retirement plan distributions.)  (Remember distributions from inherited IRAs that have a nonspouse beneficiary aren’t eligible for rollovers.)

Excess deferrals for 2019 contributed to a qualified retirement plan or IRA should be distributed by the plan by July 15, 2020.

Here is a URL for Notice 2020-23.  https://www.irs.gov/pub/irs-drop/n-20-23.pdf

Here is a URL for Revenue Procedure 2018-58.  https://www.irs.gov/pub/irs-drop/rp-18-58.pdf

Here is a URL for Regulations § 301.7508-1. https://www.govinfo.gov/content/pkg/CFR-2012-title26-vol18/pdf/CFR-2012-title26-vol18-sec301-7508A-1.pdf

Tax and financial advice from the Silicon Valley expert.