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

CLOSE

Readers are intensely interested in IRAs.

One topic that comes up the most lately, judging by the number of questions we receive:

Required minimum distributions.

RMDs are back, after being halted last year.

Folks 72 and older must take annual RMDs from traditional IRAs or pay a 50% penalty. For 2021, you start with your IRA balances as of Dec. 31, 2020, and use IRS Pub. 590-B to come up with the amount required to be withdrawn. The amounts can be taken from any IRA you pick. The same rules apply to 401(k)s and other workplace defined-contribution plans, with two important exceptions. First, people who work past 72 can delay RMDs from their current employer’s 401(k) until they retire, provided they don’t own more than 5% of the firm that employs them. Second, for people with multiple 401(k)s, the RMD must be taken from each account.

If 2021 is your first RMD year, you have until April 1, 2022, to take the RMD. The distribution will still be based on your total IRA balance as of Dec. 31, 2020. If you opt to defer your first RMD to 2022, you will be taxed in 2022 on two payouts: The one for 2021 that you deferred and the RMD for 2022. This doubling up would hike your 2022 income and could push you into a higher income tax bracket.

New life expectancy tables for calculating RMDs apply for 2022 and beyond.

The revised tables allow distributions to be spread out over more years because they account for more-current individual mortality rates. In general, they reflect life expectancies about one to two years longer than the existing tables. Basing RMDs on longer life expectancies will allow plan participants and IRA owners to take out smaller annual payouts, letting them keep money in their accounts longer.

Charitable donations made directly from a traditional IRA can save taxes. People 70½ and older can transfer up to $100,000 yearly from IRAs directly to charity. If married, you and your spouse can give up to $100,000 each from your separate IRAs. Qualified charitable distributions can count as RMDs, but they are not taxable and they are not added to your AGI. You can’t deduct the donation on Schedule A. The IRA-to-charity strategy can be a good way to get tax savings from charitable gifts for taxpayers not taking charitable write-offs because of higher standard deductions.

The money from the IRA must go directly to a charitable organization. Transfers to a donor-advised fund, charitable gift annuity, charitable remainder trust or any other life-income or split-interest gift arrangement are not treated as QCDs.

We’re watching a bipartisan House bill that addresses retirement savings.

Among its provisions: Hike the age for first taking RMDs to 73 in 2022, 74 in 2029 and 75 in 2032. Lower the 50% excise tax for failure of account owners to take RMDs to 25% or 10%. Plus index to inflation each year the $100,000 QCD cap and allow a one-time QCD transfer of up to $50,000 through split-interest entities.

Tax Statistics

Wonder how your itemized deductions stack up against those of other filers?

Check the averages in this table. It compares four Schedule A write-offs claimed by filers with various incomes, using IRS’s preliminary data from 2019 returns:

Several things to keep in mind about the data. Far fewer filers are itemizing on Schedule A because of the 2017 tax reform law, which hiked the standard deduction and pared down itemizations. 16.96 million returns claimed $637 billion in itemizations for 2019, while 140.6 million returns took $2.4 trillion of standard deductions. The taxes-paid figure is the net amount after application of the $10,000 limit for deducting state and local taxes on Schedule A. Also, the last column of the table includes casualty losses and the few miscellaneous itemized deductions that remain.

You won’t automatically be audited for having above-average deductions. But if your write-offs are disproportionately large when compared with your income, your audit risk can go up because that’s a key factor in IRS’s return selection process.

The number of filers paying the alternative minimum tax continues to fall. 150,514 taxpayers owed AMT with their 2019 returns, totaling about $2.6 billion. Compare this with $36.4 billion in AMT reported on 5.07 million 2017 returns. This is a direct result of the 2017 tax law, which eased many of the AMT rules.

Capital Gains

President Biden wants higher taxes on capital gains and dividends of the rich. The top 20% tax rate on long-term capital gains and qualified dividends now starts at taxable incomes of $445,851 for singles and $501,601 for joint filers.

Biden calls for a 39.6% rate … 43.4% with the 3.8% investment income surtax.

Taxpayers reporting $1 million or more of AGI would be impacted. The same threshold would apply to single filers and couples filing a joint return. For example, a couple reporting AGI of $1.1 million, consisting of $900,000 in wages and $200,000 in long-term gains, would have $100,000 of their capital gains taxed at 23.8% and $100,000 taxed at 43.4% if Biden’s plan goes into effect.

This is proposed to be retroactive, applying to gains after April 28, 2021, the date Biden released his American Families Plan, in which this idea was included. The retroactive nature of this provision is intended to deter wealthy individuals from quickly dumping their stock in fear of a tax hike and causing large market swings.

Most other tax hikes that Biden is calling for would apply beginning in 2022.

Natural Disasters

With hurricane season here, IRS has some suggestions on how to prepare for a disaster. Safeguard your tax records and take pictures or videos of the contents of your home or business before a disaster even strikes. Put originals of key documents inside waterproof containers in a secure space. You may also want to scan them for storage on flash drives or other electronic media. IRS Publications 584 and 584-B can be used to help compile a list of your assets.

And if you are affected by a disaster, the Service is here to help. It has a designated toll-free number for disaster-related questions: 866-562-5227.

Estate Taxes

Who’s the spouse of a decedent who wed more than once? Wife 1 or wife 3? A man and wife 1 got a Jewish religious divorce from a rabbinical court in N.Y. The man later married wife 3 in Israel, and the couple lived in N.Y. for many years. The man died and left his estate to wife 3, and the estate claimed the marital deduction. IRS said, not so fast, arguing that wife 1, not wife 3, was the surviving spouse. The Tax Court allowed the write-off, saying the decedent’s Israeli marriage to wife 3 was valid under N.Y.’s place-of-celebration test (Est. of Grossman, TC Memo. 2021-65).

Business Taxes

A big step for the U.S.’s push for a global minimum corporate tax rate. The Biden administration has been urging the governments of other nations to sign on to a minimum worldwide tax rate that would discourage multinational firms from reporting their income in countries with low local corporate tax rates.

The G7 countries have now agreed to a minimum rate of at least 15%.

But there are lots of challenges ahead for the accord to become official: Buy-in will have to come from a much broader group of countries than just the U.S., Canada, France, Germany, Italy, Japan and the U.K. The deal would need approval from Congress, which is certainly not a given in these hyperpartisan times. Plus, there are lots of fine details that will have to be thoroughly combed through.

MoneyGram is not a bank under the federal tax code, an appeals court says, affirming a late-2019 Tax Court decision. The global payment services company is known for making wire transfers of money to individuals and financial institutions. But it doesn’t accept deposits or make loans, two requisites of a traditional bank. The reason MoneyGram wanted to be a bank is because unlike most taxpayers, banks can deduct their capital losses against ordinary income. And MoneyGram had hundreds of millions of dollars in capital losses (MoneyGram Intl., 5th Cir.).

The Service is using data from Form 1099-K to generate audit leads. Presently, third-party payment networks must send the 1099-K to payees who have over 200 transactions and were paid more than $20,000 during the year.

If you receive a 1099-K, be sure to correctly report the income. IRS’s computers flag mismatches with receipts reported on Schedule C of the 1040.

A man learned this the hard way. He would buy items online from a store or auction website, sell them on Amazon and have them shipped directly to the buyer. Amazon sent him and IRS a 1099-K showing $29,500, which he omitted on his return. The mismatch triggered an IRS audit. Not only does he owe tax on the $29,500, but IRS disallowed his cost-of-goods-sold deduction reported on Schedule C because he couldn’t substantiate the purchases (Legoski, TC Summ. Op. 2021-15).

Remember that the 1099-K reporting rules are slated to change. Starting with the 2022 tax year, third-party payment networks such as PayPal, Airbnb and Amazon must send 1099-Ks to payees who were paid more than $600 in a year, regardless of the number of transactions. This means more people than ever before will receive 1099-K forms that they’ll use when filling out 1040s for 2022 and later.

State Taxes

Internet sales taxes have spread like wildfire, after a Supreme Court ruling in June 2018 blessed a S.D. law that requires many out-of-state sellers with no physical presence in the state to collect sales tax from S.D. buyers.

All states that impose sales taxes now have remote sales tax laws. States see this as a significant revenue raiser. Sales by small shops are exempt, although the states don’t have the same dollar or minimum-transaction thresholds. In fact, many state statutes use only a dollar threshold to determine who’s exempt. Mo. is the last state to jump on the bandwagon. Its law takes effect in 2023.

Four states have no state or local sales tax: Del., Mont., N.H. and Ore. Although Alaska doesn’t have a state sales tax, it does have local taxes.

Payroll Taxes

The Social Security wage base is projected to rise to $145,500 for 2022. That’s the White House budget forecast. If you’re doing longer-range planning, the estimates are $153,000 for 2023, $159,000 for 2024 and $164,700 for 2025. The final number, based on national average-wage-index growth, comes in mid-Oct.

Stimulus Break

IRS is starting to pay out refunds on the unemployment benefits tax break. Biden’s April stimulus law made up to $10,200 of unemployment benefits received in 2020 nontaxable for taxpayers with AGIs of less than $150,000. In general, individuals who filed their 2020 Form 1040 before the law was enacted needn’t amend it to claim the break. IRS is adjusting their tax and sending refunds.

Refunds will go through the summer, as IRS is looking at returns in phases.

Some people may want to file an amended return to claim the break if the $10,200 exclusion makes them eligible for the earned income tax credit or other refundable credits that they didn’t claim on their originally filed return.

Preparers

IRS’s Practitioner Priority Service operators won’t resolve collection issues. Under new agency procedures, collection matters will be handled only by IRS’s Small Business & Self-Employed Automated Collection System. This means that tax pros can no longer call the Practitioner Priority Service line for assistance with installment plans or other collection alternatives for clients. They must call ACS.

Municipal Bonds

Will Build America Bonds make a comebackSome lawmakers want this. These taxable municipals, which were issued by states and localities in 2009 and 2010, came with a generous 35% federal subsidy that went either to the issuers to reduce their borrowing costs or to investors as a tax credit for 35% of the interest. The Democratic head of the House Ways & Means Com. is advocating for a return of the bonds to help fund the infrastructure package Congress is working on.

Biden’s infrastructure plan doesn’t include Build America Bonds.

But he proposes a similar idea: Qualified School Infrastructure Bonds. Interest on QSIBs would be taxable, but the bonds would come with a subsidy for bondholders in the form of either a tax credit equal to 100% of the interest or equivalent cash payments. Proceeds would be used to invest in school facilities.

Enforcement

Doling out improper refundable tax credits continues to plague IRS. The agency estimates that in 2020 it wrongly refunded $16 billion in earned income credits, $4.5 billion in refundable child credits and $2.3 billion in American Opportunity Tax Credits. IRS attributes these erroneous payments in part to complexity in the tax rules, unscrupulous or incompetent preparers, the high turnover of taxpayers eligible to take the credit, and refund fraud.

Early access to W-2 data shows promise for curbing improper EITC paymentsgovernment auditors acknowledge. The Service does pre-refund compliance checks to compare income and withholding data on 1040 returns claiming the EITC with third-party data shown on filed W-2s and certain 1099 forms. This process has been made easier now that IRS has earlier access to W-2s and the 1099-NEC.