A Safer Retirement and Environment – What We’re Implementing to Help Keep You Safe: READ MORE

Here at Senior Tax & Insurance Advisors, PLLC, we are adhering to state and local guidelines in order to protect both the health and safety of clients and staff. Keeping our clients and staff safe is our highest priority and we’re taking all appropriate measures to ensure a safe environment. Should you prefer to not meet face-to-face, we are continuing to serve our clients through virtual settings such as Zoom or phone calls.

We look forward to continuing to help individuals and families achieve their ideal retirements.

Senior Tax & Insurance Advisors, PLLC
(512) 833-6557

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We always appreciate questions from readers. It helps us to know what topics you are interested in.

Here are recent queries and our answers.

I inherited an IRA from my aunt last year.

When must I take distributions from it?

You have 10 years from your aunt’s death to clean out the account. This doesn’t mean payouts must be distributed evenly over a 10-year period. You can wait until year 10 to take out all the money, get annual payouts, or skip multiple years, if you want, as long as the IRA is depleted within 10 years.

Many inherited IRA beneficiaries can stretch distributions over their lifetimes: Surviving spouses of the account owner. Beneficiaries who are chronically ill, disabled or not more than 10 years younger than the deceased IRA owner. Minor children (until a child reaches 18). And individuals who inherited IRAs before 2020.

I just made a qualified charitable distribution from my traditional IRA.

Will the 2021 Form 1099-R that I get early next year reflect the QCDNo. People age 70½ and older can transfer up to $100,000 yearly from traditional IRAs directly to charity. These QCDs can count as part of required minimum distributions, but they are not taxable, and they are not added to your adjusted gross income.

The 1099-R will show only the distribution. The reason for this is custodians lack firsthand knowledge to discern whether a particular payout meets the QCD rules.

When filling out your Form 1040 or 1040-SR, include the total amount of IRA distributions shown on the 1099-R on line 4a. Then subtract the QCD and report the remainder, even if $0, on line 4b. Write “QCD” next to line 4b. If filing electronically, a drop-down box for line 4 gives you a choice to click QCD.

My spouse and I jointly own our home, which has substantially appreciated.

How do the stepped-up basis rules currently work if one of us dies?

If you don’t live in a community property state, half of the home will get a step-up in basis upon the death of the first-to-die spouse. For example, let’s say you and your spouse bought a home for $100,000 many years ago, and it is worth $750,000 on the date the first of you dies. The surviving spouse’s basis in the home would be $425,000 (his or her half of the original $100,000 basis plus half of the deceased spouse’s $750,000 date-of-death value).

The rules are more generous if the house is held as community property. The entire basis is stepped up to fair market value when the first spouse dies.

Will Congress enact rules for unenrolled preparersIt’s possible. President Biden, tax practitioner groups and others want tax preparer oversight. A House bill would give IRS statutory authority to revive its prior regulatory program over unenrolled preparers, which was struck down by an appeals court in 2014. That regime required preparers who were not enrolled agents, CPAs or attorneys to pass a tax exam and background check and to take continuing education courses.

IRAs

Let’s take a look at three important rules if contemplating an IRA rollover:

First, the money must be returned within 60 days or the distribution is taxed. It’s also hit with an early payout penalty for people under age 59½. IRS offers relief if you return the funds to the IRA after the 60-day period. You can self-certify that you qualify for a waiver of the 60-day rule, provided you meet certain conditions. The late rollover must be for one of 11 reasons and be completed within 30 days after the reason for failing to timely do it in the first place ceases. If you are unable to meet these conditions, your only option is to seek a private letter ruling from IRS.

Second, you must roll over the same property that you received from the IRA. For example, if you took a cash distribution, then cash must be deposited in a rollover. If the payout was in 100 shares of Disney stock, those same shares must be put back.

Third, don’t violate the one-rollover-every-12-months rule. This rule applies on an aggregate basis to all your IRAs, not on an IRA-by-IRA basis. Note that IRA owners with multiple IRAs can make unlimited trustee-to-trustee transfers between IRAs in a 12-month period, because such direct transfers aren’t considered rollovers. Ditto if the IRA owner is given a check payable to the new IRA for his or her benefit.

Benefit Plans

More retirement plan failures can now be corrected by plan sponsors. IRS has updated its Employee Plans Compliance Resolution System to add two defined-benefit overpayment correction methods to encourage employers to avoid seeking recoupment of benefit overpayments made to plan participants. The agency has also tweaked its long-standing voluntary correction program and self-correction program, applicable to sponsors of 401(k)s, 403(b)s and the like. Revenue Procedure 2021-30 has the details, including illustrative examples.

Financially troubled multiemployer pension plans get some relief. Insolvent plans in critical and declining status that meet other eligibility criteria are able to apply for special financial assistance to pay benefits through 2051 from a newly created $94 billion fund within the Pension Benefit Guaranty Corp. PBGC regulations provide eligibility guidance, rules for figuring out the amount of aid that a plan can get, the application process, restrictions and conditions, and more. See www.kiplinger.com/letterlinks/pbgcsfa to view the regulations in full.

Preparers

An all-digital option for tax pros to file Forms 2848 and 8821 is now available. The Tax Pro Account lets a tax professional initiate secure requests for authorization from his or her account, with the request sent electronically to the client’s online account for approval and electronic signature. The document is then automatically transmitted to IRS’s Centralized Authorization File database. Taxpayers without online accounts can go to www.irs.gov/account to create one. Note that this digital authorization process is available only for individual taxpayers.

Only tax practitioners with CAF numbers can use the Tax Pro Account.

Form 2848 is the power-of-attorney document for audits and inquiries.

Form 8821 permits IRS to disclose information to a tax pro or other person.

Cyberthieves are targeting preparers in their quest for taxpayer data for the purpose of filing false returns and seeking refunds. Tax pros have reported about 220 data thefts so far in 2021, up from 211 and 124 for 2019 and 2020, respectively. According to IRS, each theft report can impact hundreds of taxpayers.

There are steps tax pros can take to help safeguard their own information …

And that of their clients: Use strong passwords. Secure wireless networks by changing the router name. Install antivirus security software on electronic devices. Use multifactor authentication to protect tax preparation software accounts. Encourage clients to sign up for identity-protection personal identification numbers. Back up electronic taxpayer data. Create a data security plan. Encrypt e-mails to clients. And use caution before opening links or attachments in e-mails you receive.

Real Estate

Here is one of President Biden’s tax proposals not getting much press:

Limiting the gain deferral from like-kind exchanges. When real property used in a business or held for investment is exchanged for like-kind real property, the gain that would otherwise be triggered if the realty were sold can be deferred. Prior to 2018, this break also applied to like-kind swaps of certain personal property.

Biden wants to cap the amount of deferred gain each year at $500,000 for each taxpayer … $1 million in the case of married couples filing a joint return. Gains in excess of the $500,000 or $1 million threshold would be immediately taxed.

Business Taxes

Democrats want changes to the qualified business income write-off … the 20% deduction available for the self-employed and individual owners of pass-through firms, such as S corporations, partnerships and LLCs.

Take this bill from Sen. Ron Wyden (D-OR), the Senate Finance Com. chief. It would phase out the break for individuals with taxable incomes over $400,000 and end it for people with incomes over $500,000. But it would also simplify the rules by having one income threshold and one definition of qualified business income. The proposal would remove the limitations for specified service trades and businesses as well as the rest of the formulas and calculations that now apply for upper-incomers.

Expenses in the start-up phase of a business aren’t deductible right away. Firms can elect to write off up to $5,000 of their start-up costs in the first year that they actively engage in business, with the remainder amortized over 180 months. In our last Letter, we mistakenly said the first-year start-up deduction is $10,000.

Payroll Taxes

Churches are exempt from withholding FICA tax from their clergy.

Instead, clergy generally pay self-employment tax on their ministerial wages. They do this by completing Form SE with their tax return and paying the SECA tax.

Clergy opposed to Social Security can be exempt from SECA tax.

But the exemption isn’t automatic … unless they take a vow of poverty. They must file Form 4361 or a letter with the information, which must be approved by IRS. Otherwise, the exemption is denied (Arensmeyer, Ct. of Fed. Claims).

Treating its officers as contractors causes headaches for a corporation that owned and operated day care centers. The corporation didn’t pay any salary to a couple who were its sole shareholders and officers. Instead, the couple got $200,000 in management fees and were treated as independent contractors. The company owes back employment taxes and penalties, the Tax Court decides. The couple performed substantial management, supervisory and day-to-day services, and they are deemed to be employees (Blossom Day Care Centers, TC Memo. 2021-86).

Tax Disputes

If you are able to beat IRS in court, you can recover your legal costs, such as attorney fees, if you substantially prevail on the underlying issues, unless the government shows that its litigation position was substantially justified.

A businessman who won his tax case gets attorney fees from the Service.

But the Tax Court capped his award. He argued the statutory maximum on recoverable fees didn’t apply because he couldn’t hire qualified counsel at that rate and his case was complex. But that is not enough to justify any upward adjustment. The Court OK’d lawyer fees at the statutory hourly rate (Morreale, TC Memo. 2021-90). For 2021, the cap on attorney fees received in tax cases is $210 per hour.

State Taxes

Md. is the first state to enact a tax whistle-blower law similar to that of IRS. Whistle-blowers who report substantial violations of the Md. tax laws that lead to the recovery of money owed by a taxpayer are eligible for a monetary award of 15%-30% of the amount the state recovers. This new law goes into effect Oct. 1.

Note that D.C. also has a tax whistle-blower protection statute.

Foreign Accounts

IRS and the Justice Dept. are on the prowl for undisclosed foreign accounts, devoting resources to get U.S. owners of the accounts to timely report them each year if the aggregate value exceeded $10,000 at any time during the prior year.

Penalties for nonreporting are stiff: $10,000 apiece for nonwillful violations. The larger of $100,000 or 50% of the highest balance in the account for willful failures.

If you haven’t reported your overseas accounts for 2020, you can still do so. People who missed the April 15 deadline to electronically submit FinCEN Form 114 to report foreign accounts automatically have until Oct. 15 to file the FBAR form.

Among the government’s weapons for sniffing out offshore accounts: Seeking court orders to acquire names of U.S. account owners at foreign banks. Investigating promoters and others who help their clients hide assets offshore. And foreign bank reporting on U.S.-owned overseas accounts of over $50,000 under the Foreign Account Tax Compliance Act, which was enacted in 2010.

The fine for willfully failing to report foreign accounts isn’t capped, an appeals court decides. Under the statute, the penalty for willful failures is the greater of $100,000 or 50% of the highest balance in the overseas account. IRS regulations promulgated in 1987, before the statute was amended in 2004 to add the 50% language, state that the penalty is capped at $100,000. The appeals court says the statute supersedes the regulations (Kahn, 2nd Cir.).

IRS now has a perfect 4-for-4 record in appeals courts on this issue.

Penalties for nonwillful failure to report foreign accounts survive death of the account owner, a court rules. IRS assessed the nonwillful penalty against a man who later died without paying the bill. The Service then tried to collect from his estate. The estate claimed that the penalties were penal and should be abated upon the death of the account owner. The court disagreed, saying the decision was a close call but ultimately deciding that the fine was primarily remedial (Gill, D.C., Texas).

Enforcement

IRS is eyeing promoters of abusive monetized installment-sale transactions. Essentially, this scheme promises sellers of assets the best of both worlds: Immediate cash from the sale and the ability to defer gain over a number of years. IRS’s Office of Promoter Investigations is working to expand detection and deterrence of suspect transactions. Other abusive schemes that are keeping this office busy include syndicated easement donations and fraudulent claims of R&D credits.

IRS

Biden’s push to close the tax gap by hiking IRS’s funding has hit a roadblock. A proposal to give IRS tens of billions of dollars for more audits of businesses and high-income individuals was dropped from a bipartisan Senate infrastructure plan. Republican lawmakers, who were never keen on the idea of giving IRS more money and power, pressured Democrats and the White House to jettison the proposal.

However, this initiative still has legs. Democrats are promising to insert it into their bigger spending bill on social infrastructure, which the party hopes to pass later this year, provided all Senate Democrats can get on board. According to Biden, more funding for IRS to reduce the tax gap is fair. It is also a big revenue raiser.