Diana Sowers, API's Staff Accountant and Purple-Ribbon Winner at the County Fair. This is Diana's famous Apple-Pecan Coffee Cake. Requested by so many after sampling at our Joint Chamber Coffee. ENJOY!
The Internal Revenue Service has announced that employees in 401(k) plans will be able to contribute up to $19,500 next year.
The IRS announced this and other changes in Notice 2019-59, posted today on IRS.gov. This guidance provides cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2020.
Highlights of changes for 2020
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.
The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500.
The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500, up from $13,000 for 2019.
The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2020.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)
Here are the phase-out ranges for 2020:
For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000, up from $64,000 to $74,000.
For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000, up from $103,000 to $123,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000, up from $193,000 and $203,000.
For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up from $122,000 to $137,000. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up from $193,000 to $203,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.
Key limit remains unchanged
The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
With the tax filing season quickly approaching, the Internal Revenue Service recommends taxpayers take time now to determine if they are eligible for important tax credits.
This is the second in a series of reminders to help taxpayers Get Ready for the upcoming tax filing season. The IRS recently updated its Get Ready page with steps to take now for the 2020 filing season.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for working people with low to moderate incomes who meet certain eligibility requirements. Because it’s a refundable credit, those who qualify and claim EITC pay less federal tax, pay no tax or may even get a tax refund. EITC can mean a credit of up to $6,557 for working families with three or more qualifying children. Workers without a qualifying child may be eligible for a credit up to $529.
To get the credit, people must have earned income and file a federal tax return — even if they don’t owe any tax or aren’t otherwise required to file.
Taxpayers can use the EITC Assistant to find out if they are eligible for EITC, determine if their child or children meet the tests for a qualifying child and estimate the amount of their credit.
Child Tax Credit
Taxpayers can claim the Child Tax Credit if they have a qualifying child under the age of 17 and meet other qualifications. The maximum amount per qualifying child is $2,000. Up to $1,400 of that amount can be refundable for each qualifying child. So, like the EITC, the Child Tax Credit can give a taxpayer a refund even if they owe no tax.
The qualifying child must have a valid Social Security number issued before the due date of the tax return, including extensions. For tax year 2019, this means April 15, 2020, or if a taxpayer gets a tax-filing extension, Oct. 15, 2020.
The amount of the Child Tax Credit begins to reduce or phase out at $200,000 of modified adjusted gross income, or $400,000 for married couples filing jointly.
Credit for Other Dependents
This credit is available to taxpayers with dependents for whom they cannot claim the Child Tax Credit. These include dependent children who are age 17 or older at the end of 2019 or parents or other qualifying individuals supported by the taxpayer.
Publication 972, Child Tax Credit, available now on IRS.gov, has further details and will soon be updated for tax year 2019.
Two credits can help taxpayers paying higher education costs for themselves, a spouse or dependent. The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are claimed on Form 8863, Education Credits. The AOTC is partly refundable.
To get either credit, the taxpayer or student usually must receive Form 1098-T, Tuition Statement, from the school attended. Some exceptions apply. See the instructions to Form 8863 for details.
Interactive Tax Assistant
The IRS urges taxpayers to use the agency’s Interactive Tax Assistant (ITA) to help determine if they can claim any of these credits. The ITA also provides answers to general questions on filing status, claiming dependents, filing requirements and other topics.
Start with IRS.gov for help that includes tools, filing options and other services and resources. Taxpayers increasingly use IRS.gov as their first resource for tax matters. Information in languages other than English is available under the language tab on IRS.gov.
Filing electronically is easy, safe and the most accurate way to file your tax return. There are a variety of free electronic filing options for most taxpayers including using IRS Free File for taxpayers with income below $66,000, or Fillable Forms for taxpayers who earn more. Taxpayers who generally earn $56,000 or less can have their return prepared at a Volunteer Income Tax Assistance site. Tax Counseling for the Elderly sites offer free tax help for all taxpayers, particularly those who are 60 years of age and older.
Taxpayers should be on the lookout for new variations of tax-related scams. In the latest twist on a scam related to Social Security numbers, scammers claim to be able to suspend or cancel the victim’s SSN. It’s yet another attempt by con artists to frighten people into returning ‘robocall’ voicemails.
Scammers may mention overdue taxes in addition to threatening to cancel the person’s SSN. If taxpayers receive a call threatening to suspend their SSN for an unpaid tax bill, they should just hang up.
Make no mistake…it’s a scam.
Taxpayers should not give out sensitive information over the phone unless they are positive they know the caller is legitimate. When in doubt –hang up. Here are some telltale signs of this scam. The IRS and its authorized private collection agencies will never:
The Internal Revenue Service today urged families and teens to stay vigilant in protecting personal information while connected to the internet. Although the IRS is making huge strides in fighting identity theft and thwarting fraudulent tax returns, help is needed.
During National Work and Family Month, IRS is asking parents and families to be mindful of all the pitfalls that can be found by sharing devices at home, shopping online and through navigating various social media platforms. Often, those who are less experienced can put themselves and others at risk by leaving an unnecessary trail of personal information for fraudsters.
The IRS has joined with representatives of the software industry, tax preparation firms, payroll and tax financial product processors and state tax administrators to combat identity theft refund fraud to protect the nation's taxpayers. This group, the Security Summit, has found methods to help reduce fraudulent tax returns entering tax processing systems.
Staying safe online
Here are a few common-sense suggestions that can make a difference for children, teens and those who are less experienced:
Great information from the IRS found in - IR-2019-175
Receiving income tax basis for a contribution of debt to an S corporation is an important issue. Tax basis allows a shareholder to determine the tax effect of transactions with the corporation. It’s a measure of the shareholder’s investment in the corporation and is adjusted upward by the shareholder’s share of corporate income and downward by the portion of the corporation’s losses (and nondeductible expenses) allocated to the shareholder. Similarly, any expenses that the shareholder transfers to the corporation will increase basis and expenses the shareholder receives from the corporation will decrease basis.
But, what if the shareholder loans money to the corporation? Will that increase the shareholder’s stock basis? The answer is that “it depends.”
Shareholder loans and stock basis – it’s the topic of today’s blog post.
Debt Basis Rules
A fundamental principle is that debt basis has no impact on the determination of gain or loss on the sale of stock. It also doesn’t impact the tax ability of an S corporation’s distributions. Two fundamental principles apply: 1) debt basis has only one purpose – to “soak up” losses that are allocated to a shareholder; and 2) a shareholder in an S corporation gets basis only for those debts made directly from the shareholder to the S corporation. That means for a shareholder to get debt basis, the shareholder must make the loan directly to the S corporation rather than through a related party (entity) that the shareholder owns. There must be an “economic outlay” that (as the courts have stated) makes the shareholder “poorer in a material sense.” See, e.g., I.R.C. §1366(d)(1)(B).
Regulations and Cases
In 2014, the Treasury adopted regulations on the matter. The regulations, known as the “bona fide debt” provisions appeared to replace the “actual economic outlay” test set forth by the judicial decisions on the matter. Under the regulations, the debt must satisfy two requirements: 1) the debt must run directly from the shareholder to the S corporation; and 2) the debt must be bona fide as determined under general federal tax principles based on the facts and circumstances. Treas. Reg. §1.1366-2(a)(2).
In Oren v. Comr., 357 F.3d 854 (8th Cir. 2004), a case decided by the U.S. Court of Appeals for the Eighth Circuit in 2004 (a decade before the 2014 regulations) the court held that a taxpayer lacked enough stock basis to deduct losses passed through to him from his S corporations. He had created loans between himself and his commonly owned S corporations. The transactions were designed to create stock basis so that he could deduct corporate losses. The taxpayer’s S corporation loaned $4 million to the taxpayer. He then loaned the funds to another S corporation in which he was also an owner. The second S corporation then loaned the funds back to the first S corporation. All of the transactions were executed on the same day with notes specifying that the interest was due 375 days after demand. Annual interest was set at 7 percent. The taxpayer claimed that he could use the debt basis created in the second S corporation to deduct the pass through losses on his individual return. The IRS disagreed and the court agreed with the IRS – he wasn’t poorer in any material sense after the loans were made and he had no economic outlay. The only thing that happened was that there were offsetting bookkeeping entries. There were also other problems with the way the entire transaction was handled.
In Meruelo v. Comr., No. 18-11909, 2019 U.S. App. LEXIS 13305 (11th Cir. May 6, 2019), a case involving a tax year after the 2014 regulations became effective, the taxpayer was a shareholder in an S corporation that bought a condominium complex in a bankruptcy sale. To fund its operations, the S corporation accepted funds from numerous related entities. Ultimately, lenders foreclosed on the complex, triggering a large loss which flowed through to the taxpayer. The taxpayer deducted the loss, claiming that the amounts that the related entities advanced created stock basis (debt basis) allowing the deduction. The IRS disallowed the deduction and the Tax Court agreed.
The appellate court affirmed on the grounds that the advances were not back-to-back loans, either in form or in substance. In addition, the related entities were not “incorporated pocketbooks” of the taxpayer. There was no economic outlay by the taxpayer that would constitute basis. There was no contemporaneous documentation supporting the notion that the loans between the taxpayer and the related entities were back-to-back loans (e.g., amounts loaned to a shareholder who then loans the funds to the taxpayer), and an accountant’s year-end reclassification of the transfers was not persuasive. While the taxpayer owned many of the related entities, they acted as business entities that both disbursed and distributed funds for the S corporation’s business expenses. The appellate court noted the lack of case law supporting the notion that a group of non-wholly owned entities that both receive and disburse funds can be an incorporated pocketbook. To generate basis, the appellate court noted, a loan must run directly between an S corporation and the shareholder.
Some had thought that the 2014 regulations had materially changed the way that debt basis transactions would be looked at in the S corporation context. Indeed, the preamble to the regulations did lead to the conclusion that the IRS was moving away from the “economic outlay” test to a “bona fide indebtedness” test (except in the context of shareholder guarantees). See also Treas. Reg. §1.1366-2(a)(2). That lead some to believe that debt basis could be created without an economic outlay. Meruelo establishes that such a belief may not be true.
The lesson of Meruelo (and prior cases) is clear. Debt basis won’t result with a loan from a related party, and it won’t result from simply a paper transaction entered into near the end of the tax year. Don’t cut corners. Pay the money yourself or borrow it from a third party (such as a bank) and then loan the funds directly to the S corporation. Also, make sure that the transaction is booked as a loan. Interest should be charged, and a maturity date established. Make a duck look like a duck.
Shared from: https://lawprofessors.typepad.com/agriculturallaw/
With school back in session, parents and students should look into tax credits that can help with the cost of higher education. They do this by reducing the amount of tax someone owes on their tax return. If the credit reduces tax to less than zero, the taxpayer may get a refund.
Taxpayers who pay for higher education in 2019 can see these tax savings when they file their tax returns next year.
If taxpayers, their spouses or their dependents take post-high school coursework, they may be eligible for a tax benefit.There are two credits available to help taxpayers offset the costs of higher education. The American opportunity tax credit and the lifetime learning credit may reduce the amount of income tax owed. Taxpayers use Form 8863, Education Credits, to claim the credits.
To be eligible to claim the American opportunity tax credit, or the lifetime learning credit, a taxpayer or a dependent must have received a Form 1098-T from an eligible educational institution.
The American opportunity tax credit is:
The lifetime learning credit is:
The Internal Revenue Service is automatically waiving the estimated tax penalty for the more than 400,000 eligible taxpayers who already filed their 2018 federal income tax returns but did not claim the waiver.
The IRS will apply this waiver to tax accounts of all eligible taxpayers, so there is no need to contact the IRS to apply for or request the waiver.
Earlier this year, the IRS lowered the usual 90% penalty threshold to 80% to help taxpayers whose withholding and estimated tax payments fell short of their total 2018 tax liability. The agency also removed the requirement that estimated tax payments be made in four equal installments, as long as they were all made by January 15, 2019. The 90% threshold was initially lowered to 85% on January 16 and further lowered to 80% on March 22.
The automatic waiver applies to any individual taxpayer who paid at least 80% of their total tax liability through federal income tax withholding or quarterly estimated tax payments but did not claim the special waiver available to them when they filed their 2018 return earlier this year.
"The IRS is taking this step to help affected taxpayers," said IRS Commissioner Chuck Rettig. "This waiver is designed to provide relief to any person who filed too early to take advantage of the waiver or was unaware of it when they filed."
Refunds planned for eligible taxpayers who paid penaltyOver the next few months, the IRS will mail copies of notices CP 21 granting this relief to affected taxpayers. Any eligible taxpayer who already paid the penalty will also receive a refund check about three weeks after their CP21 notice regardless if they requested penalty relief. The agency emphasized that eligible taxpayers who have already filed a 2018 return do not need to request penalty relief, contact the IRS or take any other action to receive this relief.
For those yet to file, the IRS urges every eligible taxpayer to claim the waiver on their return. This includes those with tax-filing extensions due to run out on Oct. 15, 2019. The quickest and easiest way is to file electronically and take advantage of the waiver computation built into their tax software package. Those who choose to file on paper can fill out Form 2210 and attach it to their 2018 return. See the instructions to Form 2210 for details.
Because the U.S. tax system is pay-as-you-go, taxpayers are required by law to pay most of their tax obligation during the year, rather than at the end of the year. This can be done by having tax withheld from paychecks, pension payments or Social Security benefits, making estimated tax payments or a combination of these methods.
Like last year, the IRS urges everyone to do a "Paycheck Checkup" and review their withholding for 2019. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed this year. It's also an important step for those who made withholding adjustments in 2018 or had a major life change. Those most at risk of having too little tax withheld include those who itemized in the past but now take the increased standard deduction, as well as two wage earner households, employees with nonwage sources of income and those with complex tax situations.
Summertime activities often affect the tax returns people file the following year. Here are some things taxpayers do during the summer along with tips they should consider now:
Newlyweds should report any name change to the Social Security Administration. They should also report an address change to the United States Postal Service, their employers, and the IRS. This will help make sure they receive documents and other items they will need to file their taxes.
Sending kids to summer day camp.
Unlike overnight camps, the cost of summer day camp may count towards the child and dependent care credit.
While summertime and part-time workers may not earn enough to owe federal income tax, they should remember to file a return. They’ll need to file early next year to get a refund for taxes withheld from their checks this year.
Normally, employees receive a Form W-2, Wage and Tax Statement, from their employer to account for the summer’s work. They’ll use this to prepare their tax return. They should receive the W-2 by January 31 next year. Employees will get a W-2 even if they no longer work for the summertime employer.
Summertime workers can avoid higher tax bills and lost benefits if they know their correct status. Employers will determine whether the people who work for them are employees or independent contractors. Independent contractors aren’t subject to withholding, making them responsible for paying their own income taxes plus Social Security and Medicare taxes.
IRS Tax Tip 2019-10
Taxpayers who use their home for business may be eligible to claim a home office deduction. It allows qualifying taxpayers to deduct certain home expenses on their tax return. This can reduce the amount of the taxpayer’s taxable income.
Here are some things to help taxpayers understand the home office deduction and whether they can claim it: