Tax and financial advice from the Silicon Valley expert.

Not much time to protect assessed value of California real estate

Effective for transfers after February 15, 2021, the exemption from reassessment only applies to the excess of the fair market value of a primary residence (qualifying for the homeowner's real estate tax exemption) over the transferor's assessed value up to $1 million.

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Due date to “undo” 2020 IRA required minimum distributions is August 31, 2020

Normally distributions from IRAs that are required minimum distributions aren’t eligible to be rolled over.  Required minimum distributions are amounts that are required to be distributed that are based on the life expectancy of the account owner once the account owner reaches age 70 ½ or usually based on the initial beneficiary’s life expectancy for an inherited IRA account.

As a relief measure, the CARES Act suspended required minimum distributions for 2020.  The reason was the value of many IRAs had fallen and distributions would deplete the value of the account.  The CARES Act was passed on March 27, 2020, so many IRA owners and beneficiaries had already taken distributions.

In addition to the prohibition from rolling over required minimum distributions, there are two other restriction blocking potential rollovers of the distributions.  (1) Beneficiaries of inherited IRAs are prohibited from making rollovers and (2) Taxpayers are limited to one IRA rollover for a 12-month period.

The IRS provided additional relief from these requirements in Notice 2020-51.  The IRS designates restoration of 2020 IRA required minimum distributions as “repayments.”  As repayments, the restoration of the funds to an IRA is not a rollover.  Since they are not rollovers, beneficiaries of inherited IRAs are permitted to make restorations and the limitation to one IRA rollover for a 12-month period doesn’t apply.

In order to qualify for this relief, a restoration must be completed by August 31, 2020.

If the deadline is missed, the only way to restore the funds will be as a rollover, subject to the once in a 12-month period limit and not available for inherited IRA accounts.

If you have a question about this matter, consult your tax advisor.

Federal tax deadline extended from April 15 to July 15

Treasury Secretary Mnuchin has announced the federal tax deadline for filing 2019 income tax returns and making tax payments has been extended from April 15 to July 15, 2020.

Here is the text of his tweet:

“At @realDonalTrump’s direction, we are moving Tax Day from April 15 to July 15.  All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”

California will probably conform to the due date change.  (California previously announced extending the due date to June 15, 2020.)

Will any of these extenders cut your tax bill for 2018 or 2019?

The domestic spending bill, H.R. 1865, Further Consolidated Appropriations Act, 2020, enacted on December 20, 2019, includes the extension of several tax breaks that previously expired on December 31, 2017.

If you qualify, you can amend your 2018 federal income tax returns to claim a refund and use the tax breaks on your 2019 federal income tax returns.  Remember the breaks might not apply to your state income tax return.  See your tax advisor.

Here are some of the extended tax breaks.

  • The exclusion for up to $2 million ($1 million for married, filing separately) of discharged qualified principal residence indebtedness has been extended to discharges before January 1, 2021.
  • The treatment of mortgage interest insurance premiums as residential mortgage interest has been extended to payments before January 1, 2021.
  • The “above the line” deduction for up to $4,000 of qualified education expenses for taxpayers with modified adjusted gross income up to $65,000 ($130,000 for married, filing joint returns) has been extended to payments before January 1, 2021.  If modified adjusted gross income exceeds the thresholds, the deduction limit is reduced to $2,000 until the taxpayer’s adjusted gross income reaches $80,000 ($160,000 for married, filing joint returns.)
  • The floor for the medical expense deduction is reduced from 10% to 7.5% and there is no alternative minimum tax adjustment for payments before January 1, 2021.
  • The Health Insurance Costs Credit has been extended to payments before January 1, 2021.  It was previously scheduled to expire on December 31, 2019.  Since it won’t apply to most people who read this, I won’t get into the details here.
  • The Energy Efficient Home Credit is extended through 2020 for homes acquired through 2020.  The credit applies to contractors who construct or manufacture qualifying energy efficient homes in the year the homes are sold or leased for use as a residence.  The credit is $2,000 or $1,000, depending on whether the home is constructed or manufactured and on the energy savings standards satisfied.
  • The Nonbusiness Energy Property Credit is extended to property placed in service before 2021.  The nonbusiness energy property credit is (1) 10% of the amounts paid or incurred for qualified energy efficiency improvements installed during the tax year, and (2) 100% of the amounts paid or incurred for qualifed energy property, subject to limits.  The maximum lifetime credit is $500.
  • The Qualified Fuel Cell Motor Vehicles Credit has been extended to motor vehicles purchased before 2021.  The credit applies for vehicles propelled by combining oxygen with hydrogen and creating electricity.  The base credit is $4,000 for vehicles weighing 8,500 pounds or less.  Heavier vehicles can qualify for up to a $40,000 credit.
  • The Two-Wheeled Plug-In Electric Vehicle Credit has been extended to vehicles acquired before 2021.
  • The Alternative Fuel Refueling Property Credit has been extended to property placed in service before January 1, 2021.  The credit is 30% of the cost of any qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the tax year.
  • The Employer Credit for Paid Family and Medical Leave has been extended through 2020.  Eligible employers may claim a general business credit equal to an applicable percent of the amount of wages paid to qualified employees during any period in which the employees are on family and medical leave, provided the rate of payment under the program is at least 50% of the wages normally paid to the employee.
  • The Work Opportunity Credit has been extended through 2020.  Employers are generally allowed a 40% credit for qualified first-year wages paid during the tax year to individuals who are members of a targeted group of employees.

This list is not complete.  See your tax advisor for more details.

Increased standard deduction means increased net investment income tax

The Tax Cuts and Jobs Act of 2017 increased the standard deduction for 2018 to $24,000 for married taxpayers filing joint returns, $18,000 for heads of households, and $12,000 for other taxpayers.  This means most taxpayers will now be using the standard deduction to compute their federal income tax.

In the past, taxpayers who itemized their deductions could deduct part of their state income tax deduction when computing their 3.8% tax on net investment income (net investment income tax, or NIIT.)

Since they will not be claiming the state income tax deduction for regular tax purposes when they claim the standard deduction, they will “lose” that deduction when they compute their NIIT for 2018.

Here is the rationale for my conclusion that taxpayers who claim the standard deduction aren’t eligible to claim a deduction for state income taxes for the NIIT.

Reg. Sec. 1.1411-1(a) gives the general rule that, unless otherwise detailed in the regulations, the regular tax rules apply for the computation of the net investment income tax. (So, unless there is a defined exception, an election to claim the standard deduction will also apply for the NIIT.)

Reg. Sec. 1.1411-4(a) defines net investment income as the excess of investment income (as defined) over deductions properly allocated to the income.

Reg. Sec. 1.1411-4(f)(3)(iii) explains the deduction for state income taxes. It is based on the amount claimed for regular tax purposes, with no exception defined when a taxpayer elects to claim the standard deduction.

In most cases, taxpayers (especially married filing joint returns) will pay a lower overall tax when they claim the standard deduction compared to itemizing, even considering the net investment income tax. You are right that people haven’t been talking about the additional NIIT many taxpayers will pay when they claim the standard deduction.

For every $100 of deduction “lost”, the tax increase is $3.80.

This is a rather sneaky increase in the new tax law.

New IRS guidance for deferral of income from stock options and RSUs

The IRS has issued guidance for a new election to defer taxable income from exercising or vesting of an employee stock option or vesting of restricted stock units (RSUs).  The election is part of the Tax Cuts and Jobs Act of 2017, enacted December 22, 2017.

The new law for the election is at Internal Revenue Code Section 83(i).  The IRS guidance is Notice 2018-97, issued December 7, 2018.  The Notice is 19 pages long.

Congress was trying to provide some relief to employees who have stock-based compensation when the stock isn’t publicly traded or eligible for redemption.  The stock can’t be sold to get the cash to pay taxes.

Under the new law, the income of a taxpayer from exercising an employee stock option or from the vesting of an RSU who makes the election for qualified stock won’t be taxable until the earliest of:

(1) The first date the stock is transferable, including transferable to the employer;

(2) The date the employee first becomes an excluded employee;

(3) The first date on which any stock of the issuing corporation becomes readily tradable on an established securities market;

(4) The date that is five years after the first date the rights of the employee in such stock are transferable or not subject to a substantial risk of forfeiture, whichever occurs earlier; or

(5) The date on which the employee revokes the election (at such time and in such manner as the Secretary of the Treasury (IRS) provides.)

The requirements to qualify for the election are so onerous that I don’t expect many companies to meet them.  In a calendar year, not less than 80% of all employees who provide services to the corporation in the United States or any possession of the United States must be granted stock options or granted RSUs, with the same rights and privileges to receive qualified stock.  Stock options and RSUs usually are not used in such a nondiscriminatory way.

The notice makes it clear that this test applies each year, and grants of options and RSUs in previous years aren’t counted for the test.  Also, the test applies for all employees of the company during the calendar year, regardless of when hired or terminated.

I’m not going to explain in detail who is an “excluded employee”  It’s basically an individual who already owns at least 1% of the company stock or is a key officer of the corporation.

This is a separate election from a Section 83(b) election to treat nonvested stock received as if it was vested, accelerating income from the exercise of a nonqualified stock option.  If a Section 83(b) election is made relating to the exercise of a nonqualified stock option, the transaction isn’t eligible for a tax deferral election under Section 83(i).

If a Section 83(i) election is made for an incentive stock option or a purchase using an employee stock purchase plan, the benefits of those sections no longer apply and the transaction is treated as the exercise of a nonqualified stock option.

The income amount is based on Internal Revenue Code Section 83(a), which is the excess of the fair market value on the later of the date of exercise or the vesting date.  That date also determines when the Section 83(i) election must be made.  The election must be sent to the IRS address for the taxpayer’s federal income tax return no later than 30 days after the later of the date of exercise or the vesting date.

The IRS did not provide an example of a Section 83(i) election in the Notice.  It just says the election “shall be made in a manner similar to the manner in which an election is made under Section 83(b).”  There are important differences.  If you would like to have an example of the election that I drafted, write to me at

Any time a corporation transfers qualified stock to a qualified employee, it is required to notify the employee that the employee may be eligible under Section 83(i) to defer income on the stock.  The notice should be provided at the time an amount attributable to the stock would first be includible in the gross income of the employee, or a reasonable time before.  The notice states:

(1) The amount of income to be reported at the end of the deferral period will be based on the value of the stock at the time the rights of the employee first become transferable or not subject to a risk of forfeiture, even if the value of the stock declines before it becomes taxable;

(2) The income recognized at the end of the deferral period will be subject to federal income tax withholding at the highest federal income tax rate, with no reduction for personal exemption credits or estimated tax deductions;

(3) The responsibilities of the employee with respect to the withholding.

If an employer fails to provide the notice, it will be subject to a $100 penalty, up to a maximum of $50,000 per calendar year.

Although the federal income tax is deferred when the election is made, the amount that would otherwise have been taxable is currently subject to federal employment taxes, like social security, medicare and federal unemployment taxes.  (This could still be a hardship for employees who receive no cash and can’t sell the stock.)

Under authority provided to the IRS in the new tax law, the Section 83(i) election by the taxpayer must include an agreement that the deferral stock will be held in an escrow arrangement.  When the income relating to the stock becomes taxable, the corporation may remove shares equal in value to the required income tax withholding.  The shares may be removed up to March 31 of the year following the year the income is taxable.  The remaining shares can then be released to the employee.  The employee can alternatively pay the tax with cash, in which case all of the shares would be released to the employee.

A corporation can preclude its employees from making a Section 83(i) election by declining to establish an escrow arrangement to hold their shares until the federal income tax is paid.

If a corporation intends that employees shouldn’t make Section 83(i) elections for stock received by exercising a stock option or RSU, the terms of the stock option or RSU may provide that no election under Section 83(i) will be available with respect to stock received under the option or RSU.

This new election is a baby step.  I hope Congress provides more helpful relief to employees who receive stock options and RSUs of stock that isn’t publicly traded with more simplified rules in the future.







Tax and financial advice from the Silicon Valley expert.