Retirement planning is very important. Some of the changes brought by the SECURE Act, such as the changes related to the IRA required minimum distribution (RMD) requirements and the repeal of the maximum age limit for IRA contributions can help you plan better.

No Age Limit for IRA Contributions

Previously, with a traditional IRA the maximum age limit up to which you could contribute was 70.5 years. After this age you could not contribute anymore. Instead you had to take a minimum distribution from your retirement account.

But now, the SECURE Act brought some very favorable change. There is no maximum age limit anymore. You can contribute toward your or your spouse’s Traditional IRA as long as you have sufficient taxable compensation to support your contribution amount and you meet all the other IRA contributions rules.

It is important to note that taxable compensation does not include things such as interest and dividends from investments, pensions, Social Security benefits, unemployment benefits, alimony, and child support. These aren’t considered earned income for IRA contribution purposes.

RMD Required When You Reach 72

In addition, the SECURE Act increased the age limit for the RMD from 70.5 to 72. The RMD generally must begin by April 1 of the calendar year following the calendar year in which you reach age 72. This rule comes into effect for distributions required to be made after December 31, 2019.

These changes are sure to help your retirement fund build bigger and grow longer. You can find more information about the contribution and RMD requirements on the IRS website. If you need help with your tax return preparation or tax planning strategies, gives us a call or schedule an appointment online.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Section 529 plans give opportunities for families to save for the rising cost of college tuition fees. Education costs have been consistently increasing over the years. Federal financial aid is shifting from student grants to providing access to student loans. And this in turn leads to increased financial strain on students and their parents.

SECURE Act Expending 529 Plan Benefits

The good news is that the SECURE Act expanded benefits of 529 plans. It now allows principal and interest of the student loan repayments as eligible qualified expenses of 529 plans.

Limitations For the 529 Plans Qualified Expenses

But there are some limitations:

• payments of principal or interest on any qualified education loan of the beneficiary, or beneficiary’s sibling, are allowed. but only up to a cumulative maximum of $10,000 per beneficiary and sibling,
• payments made from any tax-free 529 plan earnings do not qualify as qualified expenses
• reduce qualified expenses, including student loan payments by any tax-free assistance such as scholarships and fellowships, grants, amounts used to calculate an education credit and other similar items.
  
  

To find out more about the college savings plans and other tax benefits for education, click here.

The 529 plans are a great tax planning tool. If you’d like to find out more how you can save for your kids’ future or need help with your taxes give us a call or schedule an appointment online.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

With Covid-19 crisis still looming over us, not just the physical health but the financial health of many is also in jeopardy. It is an ideal environment for those with ill intent to rob you of your sensitive information and/or your money under the guise of receiving the economic impact payment (EIP).

New Text Scam

IRS warns of a new text scam created by thieves to trick you in disclosing bank account information under the guise of receiving the $1200 economic impact payment. Neither the IRS nor any state agency will text you asking for bank information so that an EIP deposit can be made.

These thieves are trying to trick people with a text message that states “You have received a direct deposit of $1200 from Covid-19 Treasury Fund. Further action is required to accept this payment into your account”. The text includes a link to a fake phishing web address which appears as if coming from a reliable source.

Report the Scam to the IRS

If you happen to get such a scam text message, please take a screen shot of the text message and email it to IRS at phishing@irs.gov along with some additional information like:

• Number that received the text message
• Number that appeared on caller ID as received
• Date/Time/Time zone you received the message.

Remember IRS or states do not send unsolicited texts or emails.
The IRS and states do not threaten people with jail or lawsuits over the phone. The IRS or states do not demand tax payments on gift cards.

IP PIN

One additional layer of protection against tax identity theft is to voluntarily apply for an Identity Protection PIN (IP PIN).

The IRS allots you an IP PIN only after you pass a rigorous identity verification process validating your identity. This IP PIN is valid for one year and hence you must obtained it each year. To get an IP PIN you can use the online tool ‘Get IP PIN’ available on IRS website starting January 2021. Alternatively you can also file a paper application for IP PIN.

Don’t forget to keep the IP PIN you get in a safe location until its time to prepare your tax return.

If you need help with your tax return preparation, give us a call or schedule an appointment online.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Autumn is not just for pumpkin spiced everything, but also a perfect time to review your tax withholdings and tax payments for the year to avoid any surprises when filing next year.

With a few adjustments in your estimated tax payments and/or withholdings you can avoid surprise tax bills. Here are a few things you may consider that will affect your 2020 taxes before you make any adjustments:

Life Changes Such As Marriage

As a married couple you are now required to file a joint return. Filing a joint return usually turns out to be beneficial for a married couple. However, if you and your spouse are both working, it might put you into a higher tax bracket and would require you to make changes to your tax withholdings.

Working in the Gig Economy

Do you make any money working in the Gig economy? To name a few: drive a car for booked rides, run errands, sell goods online, rent out property or part of it. You must consider any income earned from the gig economy even if it is from part time, temporary or side work not reported on an informational return form like 1099 miscellaneous, W2 or other income statement.

Disasters Such As Wildfires and Hurricanes

If you have suffered any loss attributable to a federally declared disaster, you can be eligible to claim a casualty loss. You may want to consider the impact of this loss on your income and thereby on your taxes before paying your estimated taxes for the last quarter of 2020.

Job Loss

With the COVID-19 pandemic a lot of people lost their jobs. It can be frustrating and stressful. The last thing you want to think about, is taxes. But if you received severance pay and/or payment for accumulated sick time or vacation time, it might result in a high tax bill.

Unemployment Compensation

If you filed for unemployment benefits and received unemployment compensation, remember, it is taxable. You can either have tax withheld from the benefits or choose not to and make enough estimated tax payments.

COVID-19 Deferral of Employment Tax

There is some relief available for 2020, due to the COVID-19 pandemic. The CARES Act allows deferrals of some of the payroll tax payments. These are available to both employers and to self-employed individuals, including partners in a partnership. Click here to see more information about the employment tax deferral options.

If you need help navigating all these changes, give us a call.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Starting with the 2021 tax filing season, if you have a business taxed as a partnership, you will have to report the partners’ capital accounts on a tax basis of accounting.

Form 1065 Instructions Early Draft Released

About a week ago, IRS released an early draft of the 2020 form 1065 instructions. This draft provides information about the new reporting requirement.

Under the tax basis method, partnerships report partners’ contributions, distributions, their share of partnership net income or loss, and other increases or decreases using tax basis principles. Until now, other methods were allowed, such as: generally accepted accounting principles, contractual method, regulatory method and others.

If your business already used the tax basis of accounting to report the partners’ capital accounts on schedule K1, you will continue to report them in the same manner as before.

However, businesses taxed as partnerships, that in 2019 did not prepare Schedules K1 under the tax capital method, will need to recalculate the 2019 ending capital account balances. You can use several methods to do this:

• The Modified Outside Basis Method,
• The Modified Previously Taxed Capital Method,
• The Section 704(b) Method.

Because this might be difficult to implement, IRS announced it intends to provide penalty relief, but only for tax year 2020, for any errors in reporting the beginning capital account balances on Schedules K1. The relief applies if the business takes ordinary and prudent business care in following the 1065 form instructions to calculate and report the beginning partners’ capital account balances. IRS will issue a notice soon with details about this penalty relief for the 2020 tax year.

IRS Will Release the Final Version in December

A final version of the 1065 instructions will be released in December. In the mean time IRS is accepting comments to this draft. You have 30 days from the date of the draft release, which was October 22, 2020 to submit your comments.
The rules of tax basis of accounting can be difficult. And transitioning from a different basis of accounting can be confusing. If you need help with the preparation of your business’ tax return, give us a call.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.

Background

Crowdfunding was initially an instrument that some used in order to raise money for projects that were unlikely to turn a profit. But others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.

Is It Income?

In an “information letter” released in 2016, the IRS stated that crowdfunding revenues will generally represent income unless they are:

• Loans that you must repay
• Capital contributed to an entity in exchange for an equity interest in the entity
• Gifts made out of detached generosity without any “quid pro quo”

The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized. The IRS added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.” In addition, the IRS warns that a voluntary transfer without a “quid pro quo” is not necessarily a gift for federal income tax purposes.

Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third part will send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.

If It’s Business Income

You can deduct “ordinary and necessary” business expenses. But you might have limitations in how much you can deduct if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.

New Businesses

You can use favorable deduction rules for certain types of expenses you incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active. The remainder of the start-up expenditures are deducted ratably over a 180-month period.

For Contributors

Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements. The contributors must make their contributions to a qualified charitable organization. If you make a gift to an individual or nonqualified organization, you might need to file a gift tax return. You have this reporting for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2020).

There is no definite guidance specific to crowdfunding in the tax regulations. One must analyze each case on an individual basis in order to determine the potential tax implications. You might also consider requesting a private letter ruling from the Internal Revenue Service.

If you need help with your taxes, give us a call.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.