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Member of Russell Bedford International, a global network of independent professional service firms.
One frequently overlooked tax benefit is the spousal IRA. Generally, IRA contributions are only allowed for taxpayers who have compensation (i.e. wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as the spouse has adequate compensation.
The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse, which is $6,000 for 2020 and 2021. If the non-working spouse’s age is 50 or older, that spouse can also make “catch-up” contributions (limited to $1,000), raising the overall contribution limit to $7,000. These limits apply provided that together the couple has compensation equal to or greater than their combined IRA contributions.
Consider this example: Tony is employed and his W-2 for 2020 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limit for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $6,000 to an IRA for 2020.
The contributions for both spouses can be made either to a traditional or Roth IRA, or it can be split between them as long as the combined contributions don’t exceed the annual contribution limit. However, please be cautious that the deductibility of the traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income:
Consider this example: Rosa can designate her 2020 IRA contribution as either a deductible traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $196,000. Had the couple’s AGI been 201,000, Rosa’s allowable contribution to a deductible traditional or Roth IRA would have been limited to $3,000 because of the phase-out. The other $3,000 could have been contributed to a traditional IRA and designated as nondeductible.
If you would like to discuss spousal IRAs or need assistance with your retirement planning, please contact Cray Kaiser today.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Are you asking yourself: is my inheritance taxable? This is a frequently misunderstood taxation issue, and the answer can be complicated. When someone passes away, all of their assets (their estate) will be subject to estate taxation, and whatever is left after paying the estate tax passes to the decedent’s beneficiaries.
Sound bleak? Don’t worry, very few decedents’ estates ever pay any estate tax, primarily because the tax code exempts a liberal amount of the estate’s value from taxation; thus, only very large estates are subject to estate tax. In fact, with the passage of the Tax Cuts & Jobs Act, the estate tax exemption has been increased to $11,580,000* for 2020 and will be inflation-adjusted in future years. Generally, this means that estates valued at $11,580,000* or less will not pay any federal estate taxes, and those in excess of the exemption amount only pay estate tax on the excess amount. Keep in mind that there are less than 10,000 deaths each year for which the decedent’s estate exceeds the exemption amount, so for most estates, there will be no estate tax and the beneficiaries will generally inherit the entire estate.
*Please Note: As with anything tax-related, the exemption is not always a fixed amount. It must be reduced by prior gifts in excess of the annual gift exemption, and it can be increased for a surviving spouse by the decedent’s unused exemption amount.
For decedents that are either residents of Illinois at the time of their passing or nonresidents that have property in Illinois, the estate tax exemption is $4,000,000. So, it is possible that an estate may have a state estate tax, but not a federal estate tax.
Of course, once a beneficiary (also referred to as an heir) receives the inherited asset, any income generated by that property — be it interest from cash, rent from real estate, dividends from stocks, etc. — will be taxable to the beneficiary, just as if the property had always belonged to the beneficiary.
Because the value of an estate is based upon the fair market value (FMV) of the assets owned by the decedent on the date of their death (or in some cases, an alternative valuation date six months after the decedent’s date of death), the beneficiaries will generally receive the inherited assets with a basis equal to the same FMV determined for the estate. What this means to a beneficiary is that if they sell an inherited asset, they will measure their gain or loss from the inherited basis (i.e. the FMV at date of death).
Example #1: Joe inherits shares of XYZ Corporation from his father. Because XYZ Corporation is a publicly traded stock, the FMV can be determined by what it is trading for on the stock market on the date of his father’s passing. Thus, if the inherited basis was $40 per share and the shares are later sold for $50 a share, Joe will have a taxable gain of $10 per share. In addition, the gain will be a long-term capital gain, since all inherited assets are treated as being held long-term by the beneficiary. On the flip side, if the shares are sold for $35 a share, Joe would have a tax loss of $5 per share.
Example #2: Joe inherits his father’s home. Like other inherited property, Joe’s basis is the FMV of the home on the date of his father’s death. However, unlike the stock, the FMV of which could be determined from the trading value, the home needs to be appraised to determine its FMV. It is highly recommended that a certified appraiser performs the appraisal and that it be done reasonably close in time to the decedent’s date of death. This is frequently overlooked and can cause problems if the IRS challenges the amount used for the basis.
This FMV valuation of inherited assets is frequently referred to as a step up in basis, which is really a misnomer because the FMV can, under some circumstances, also be a step down in basis.
Not all inherited assets received by the beneficiary fall under the FMV regime. If the decedent held assets that included deferred untaxed income, those assets will be treated differently by the beneficiary. Examples of those include inherited:
Traditional IRA Accounts: These are taxable to the beneficiaries, but special rules generally allow a spouse beneficiary to spread the income over the surviving spouse’s lifetime, while the distribution period is capped at 10 years for most non-spouse beneficiaries if the decedent died after 2019. Previously, the rules allowed most non-spouse beneficiaries of decedents who died prior to 2020 to use a lifetime distribution method.
Roth IRAs: Qualified distributions are not taxable to the beneficiary.
Compensation: Amounts received after the decedent’s death as compensation for their personal services are taxable to the beneficiary.
Pension Payments: These are generally taxable to the beneficiary.
The estate tax rules could change dramatically according to the tax plan of President-Elect Joe Biden. His plan includes provisions eliminating the step up in basis. As soon as we have more information, we will update this blog.
In the meantime, if you have questions related to the tax ramifications of an inheritance, please contact Cray Kaiser at 630-953-4900.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
In the past, the IRS has assigned verification numbers to victims of identity theft to file their tax returns, if requested by the victimized individual. The number is referred to as an identity protection PIN (IP PIN). The IP PIN is a six-digit code known only to the taxpayer and the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayer’s personally identifiable information.
The IP PIN serves as the key to an individual’s tax account. Electronically filed returns that do not contain the correct IP PIN will be rejected, and paper returns will go through additional scrutiny for fraud. Effective now, anyone can request an IP PIN, it is no longer limited to victims of identity theft. Given the uptick in unemployment tax fraud, where thousands of social security numbers were compromised, now is the time to consider obtaining the IP PIN.
If you want an IP PIN for 2021, visit IRS.gov/IPPIN and use the “Get an IP PIN” tool. This online process will require that you verify your identity using the Secure Access authentication process if you do not already have an IRS account. Visit IRS.gov/SecureAccess for a list of the information you need to be successful. After you have authenticated your identity, a 2021 IP PIN will immediately be revealed.
All taxpayers are encouraged to first use the online IP PIN tool to obtain their IP PIN.
I was interested in trying out the process of obtaining an IP PIN personally. Unfortunately, the process of verifying my identity wasn’t as smooth as expected. It turns out that a large part of the verification process is through your cell phone. And what happens when the cell phone plan is not in your name but in your spouse’s name? Well, Plan B! The next step was for the IRS to mail a code to my home address. Upon receipt of the code, I could verify my identity and register my cell phone. Once in the system, less than a minute passed before I had my IP PIN. While in this particular case I faced an additional obstacle, it is still worth having the added security around filing my taxes and I would still recommend going through the process.
Taxpayers who cannot verify their identities online have other options. Certain taxpayers may complete Form 15227, Application for an Identity Protection Personal Identification Number, and mail or fax it to the IRS. An IRS customer service representative will contact the taxpayer and verify their identity by phone. Taxpayers should have their prior year’s tax return on hand for the verification process. Taxpayers who verify their identities through this process will have an IP PIN mailed to them the following tax year. This is for security reasons. Once in the program, the IP PIN will be mailed to these taxpayers each year.
We believe the identity protection PIN program is an important part of protecting your tax identity. If you have questions, please contact Cray Kaiser.
Please note that this blog is based on tax laws effective in January 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
COVID-19 has affected nearly every aspect of our lives since the pandemic began in March 2020. It has affected the finances of most Americans, creating waves of economic stress. The pandemic will have lasting tax implications that many people may have not considered. For some, it can mean simply reporting income or expenses differently. For others, it may mean having to pay additional income taxes that had not been planned for. Regardless of your specific situation, this might be the year that you should hire a tax professional to help address tax complications due to COVID-19.
As individuals are losing their jobs or had to decrease work because of the pandemic, they are turning to other sources of income such as unemployment benefits and/or dipping into retirement savings. For those who are tapping into these funds for the first time, there are likely questions about taxation, specifically whether taxes are due as a result of these additional income sources.
Are unemployment benefits taxable?
This may be surprising to you, but your unemployment benefits will be fully taxable at the federal level. In general, unemployment benefits might be taxed by the state as well, depending on where you live. For example, Alabama and California do not impose any taxes on unemployment benefits, but the benefits are fully taxable as regular income in Illinois. If you are the recipient of Illinois unemployment benefits, taxes likely have been withheld from the payments, but these may or may not cover your individual tax burden.
Are retirement benefit withdrawals taxable?
If you take out retirement benefits early (before age 59 ½), there is generally a 10% penalty imposed on any taxable distributions. However, tax changes because of COVID-19 allowed individuals to withdraw from retirement without paying the 10% penalty, as long as the withdrawal took place during 2020. You must also meet certain requirements that indicate you have a stressful financial situation because of COVID-19.
Even if you meet the qualifications, avoiding the 10% penalty is not the only tax that you must pay. Additionally, the amounts withdrawn are often taxed as income, depending on how your retirement plan was established. Many people may not recognize this additional tax cost until the tax return is filed, so they have not been planning for it. If you hire a tax professional, they will be able to guide you through the tax implications of collecting unemployment and/or withdrawing from your retirement plan and planning for the tax ramifications accordingly.
The various stimulus programs have created opportunity as well as uncertainty. The stimulus payments, in particular, generated a fair amount of misinformation as to who qualified and who didn’t qualify. As the final stimulus payment/credit will in certain cases be based on your 2020 tax filing, did you know there may be an opportunity to receive even more of a stimulus payment? Your tax professional can advise of planning that may generate an additional tax credit on your 2020 tax filing.
The best way to ensure that you are addressing tax issues appropriately with the IRS, or any other taxing authority, is to hire a tax professional. A tax professional will be able to determine if there is a valid tax issue and how to best resolve the matter.
The tax professional can also advocate with taxing authorities on your behalf. For example, there have been a number of incorrect tax notices issued, and issues with payments posting correctly. Tax professionals are aware of these challenges and can work directly with the revenue agents to ensure that not only is your account resolved, but that there are no implications to your credit score from invalid collection efforts.
Having a tax professional on your side to help you deal with tax preparation, tax planning, tax notices and negotiations with the IRS can be invaluable. Do not work through this process alone, especially if COVID-19 has created some unique issues for you in 2020. Cray Kaiser is here to help you in this process, so please do not hesitate to contact us to get started on your taxes.
Please note that this blog is based on tax laws effective in January 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
On December 27, 2020, President Trump signed a number of bills, including one that breathes new life into the Employee Retention Credit (ERC). While the headline was that employers receiving Payroll Protection Program (PPP) loans could now also claim the ERC, did you know the credit was significantly enhanced? Especially in 2021, we see the expanded credit as an incredible opportunity for employers.
Established by the CARES Act, the Employee Retention Credit was designed to incentivize employers to maintain their payroll during the coronavirus pandemic. For the period from March 13, 2020 to December 31, 2020, eligible employers could claim a 50% retention credit for qualified wages. Eligible employers included:
Qualified wages for employers of less than 100 full time equivalent employees consisted of any wages paid, assuming the business met one of the above tests. For employers of more than 100 full time equivalent employees, qualified wages were only those wages paid to employees for not working.
Annual qualified wages per employee were capped at $10,000, meaning a potential annual credit of $5,000 per employee. It should be noted that any payroll costs used on the PPP loan forgiveness application cannot be claimed as ERC creditable wages.
Effective from January 1, 2021 to June 30, 2021, the eligibility requirements have changed. Now, businesses that had a reduction in gross receipts of 20% or more during a calendar quarter as compared to a prior quarter will qualify for the ERC. The comparison is between 2021 results and 2019; additionally, the immediately preceding quarter results can be used to determine eligibility. For example, for the first quarter of 2021, an employer could compare fourth quarter 2020 results to fourth quarter 2019 results for determination of the reduction in gross receipts.
The good news doesn’t stop there! The 100 full time equivalent employee rule noted above was changed to a 500 full time equivalent employee requirement. This means employers of between 100 to 499 full time equivalent employees can include any qualified wages paid, not just wages paid for not performing services. Qualified wages are also clarified to include qualified health plan expenses.
Finally, the credit has been expanded. Qualified wages per employee are now $10,000 per quarter, instead of per year. The credit rate is now 70% of qualified wages, instead of 50%.
It’s important to note that similar to the prior provisions, payroll costs used on a PPP loan forgiveness application cannot be claimed as ERC creditable wages.
As a business owner, we expect that you are already aware of the heightened urgency in closing your accounting books in a timely manner to prove a reduction in gross receipts. Both the second round of PPP loans and the ERC require you to show a precipitous drop in your gross receipts. Timely financials will allow you to determine your eligibility more quickly, and perhaps speed up the receipt of additional loan funds and/or tax credits.
As the ERC is based on qualified wages that are not also claimed on the PPP loan forgiveness application, care should be taken in determining the costs deemed paid with PPP funds. However, for those businesses that have already filed for forgiveness, there continue to be questions on the interplay of the ERC and PPP. We will look out for developments as it relates to the payroll costs used for both ERC and PPP, as well as how to claim retroactive credits.
The Employee Retention Credit is an exciting development for businesses. Please contact us if you’d like to discuss the potential credit to your business.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for the most recent information.
On January 19, 2021 additional guidance was released to assist borrowers in applying for the second round of PPP loans. These loans became available based upon legislation passed by Congress and signed by President Trump in late December and included in the Consolidated Appropriations Act of 2021. The first round allowed loans to businesses with 500 or fewer employees and to certain businesses with multiple locations, for which each location could not have more than 500 employees. Congressional intent with the second round of PPP loans was to put additional requirements in place to specify a more targeted group of eligible businesses.
Unlike the prior loan program, this round will be limited to small businesses that incurred revenue losses. Eligibility is limited to businesses that satisfy the following:
The eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Churches and religious organizations are eligible for loans if they otherwise meet the requirements, and the legislation prevents future administrations from making them ineligible.
The legislation establishes a maximum loan size of 2.5 times the average monthly payroll costs for the twelve months prior to the loan, or the calendar year 2019, up to $2 million. Since loan applications are being prepared in January, borrowers are able to use calendar year 2020 for the twelve-month prior clause. There is an exception for borrowers in the hospitality or food services industries, who may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Loan amounts that are not forgiven will be subject to a 5-year maturity and will incur interest at 1%.
To apply for a second round of funding, please use Form 2483-SD.
Like the first PPP loan, full loan forgiveness is available if the borrower spends at least 60% of the second draw on payroll costs (this time including additional group insurance payments, including vision, dental, disability and life insurance), with allowable nonpayroll costs of 40%.
The allowable non-payroll expense category – which was originally limited to rent, mortgage interest, and utilities – has been expanded to include the following:
A few additional notes on the loan forgiveness:
Congress recently passed legislation that taxpayers whose PPP loans are forgiven are allowed deductions for deductible expenses paid using PPP loan proceeds. In addition, the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This applies retroactively to the first round of PPP loans as well.
The legislation requires the SBA to prepare regulations and implement the second-draw PPP within 10 days after the bill was signed into law (December 27, 2020) and for the program to continue through March 31, 2021.
If you did not receive a PPP loan yet, you still have time. Use Form 2483 to apply for round one of the PPP loan. For this loan you would not be subject to the revenue reduction eligibility requirements and the rules governing would include those enacted under the first round of funding.
If you have any questions about the second round of PPP loans, please contact Cray Kaiser today. We’re here to help.
Please note that this blog is based on tax laws effective in January 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
One of the more tax-troubling issues this year has been the distribution of the Economic Impact Payments, also known as stimulus checks. These payments were meant to provide financial assistance to individuals and families struggling during the initial outbreak of the COVID-19 pandemic, but many people are reporting a missing stimulus check. In this blog we’ll go through the details of the stimulus checks and how to claim a missing check on your 2020 return.
Round One
Congress authorized the first stimulus check payment in March 2020 as part of the CARES Act. Each filer was to receive $1,200 ($2,400 if married and filing a joint return) and $500 per dependent child under age 17. However, the payments were phased out for higher-income taxpayers at a rate of 5% of the taxpayer’s adjusted gross income (AGI) in excess of a threshold, also based upon the taxpayer’s AGI:
Round Two
As part of the COVID-Related Tax Relief Act (COVIDTRA), Congress authorized another set of stimulus checks to be issued in January 2021. Each filer was to receive $600 ($1,200 if married and filing a joint return) and $600 per dependent child under age 17.
Similar to round one, the stimulus payments are phased out for people with higher incomes. The phase out income levels are the same as round one; however, the payments are more quickly phased out as compared to round one. For example, a married couple filing jointly with AGI of more than $174,000 will not receive the second stimulus payments.
It’s important to note that the stimulus checks are actually a refundable tax credit on the 2020 tax return. To meet the Congressional mandate, the IRS issued the payments in advance based upon each family’s makeup and income on a prior tax return.
If you are among those eligible for a check who haven’t yet received it, or the amount you received is less than what you are allowed, take heart. Since it is really a credit on the 2020 tax return, you can claim your missing or additional amount when you file your 2020 return. But this means that if you wouldn’t normally have to file a return, you will need to do so in order to get your payment.
However, here is yet another potential problem: when you claim the rebate credit on your 2020 return, it will be based upon your 2020 AGI and family makeup, which may or may not be to your benefit. Here are some situations that you may encounter:
These are only a few examples of the many situations that a change in filing status, dependents, and/or AGI can create with regard to the recovery rebate credit when filing your 2020 tax return. One good thing is that Congress wrote the law so that if the payment you received was larger than the recovery rebate credit you are entitled to on your 2020 return, you will not have to pay back any of the difference. On the other hand, if your check was less than what’s allowed on your 2020 return, you can claim the difference as a credit on the 2020 return.
Be sure to keep the confirmation that the IRS sent you showing the amount of your stimulus check; you’ll need it when preparing your 2020 return.
If Cray Kaiser is preparing your tax return this year, we will automatically take care of reconciling the advance rebate with the amount determined on your 2020 return. Please call us at 630-953-4900 if you have specific questions about your missing stimulus check.
Please note that this blog is based on tax laws effective in January 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
In this audio blog, CK Principal Karen Snodgrass addresses some common questions surrounding potential future COVID-19 relief, including:
Of course, we don’t know exactly what will happen in the coming months. With a new administration and the pandemic still surging, there is a lot at play. Rest assured, as developments occur, we’ll be sure to keep you informed on our blog. In the meantime, you can listen to Karen’s current insights and predictions of future COVID-19 relief below:
If you have any questions about current or future COVID-19 relief, please don’t hesitate to contact Cray Kaiser today.
Please note that this blog is based on laws effective on Friday, January 15 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Some information found in this blog has been updated. Please see the newest version here.
The original regulations regarding the Meals and Entertainment deductions were part of the 2018 Tax Cuts and Jobs Act (TCJA). Companies and self-employed individuals have been subject to these rules since then; however, there was ambiguity regarding the rules over the past few years. Fortunately, the IRS recently published the final regulations regarding the changes to the Meals and Entertainment deductions under the TCJA.
If you recall, prior to the TCJA, both meals and entertainment expenses were at least 50% deductible with a few other expenses being fully deductible. Under the TCJA regulations, there were some categories of the meals that were still eligible for 50% deduction just as under the old law. Meals with clients, meals during business travel, and meals at seminars and conference all continue to be 50% deductible. However, there were significant changes to some categories of meals and entertainment expenses:
1) Entertainment expenses, such as sporting events and club memberships that were 50% deductible under the old law are not deductible under the TCJA. Note that meals purchased separately at these events for the client while discussing business would still be eligible for a 50% deduction.
2) Meals, water, coffee, snacks, etc. at the office for benefit of employees are now eligible for only a 50% deduction. Under the prior law, these expenses were eligible for the full deduction.
We suggest that your accounting records segregate entertainment, meals, and office snacks in separate accounts to identify the proper deductibility of these expenses. Please note that picnics and holiday parties held primarily for the benefit of your employees will continue to be fully deductible. We suggest that this amount be recorded in a separate account from the entertainment, meals, and office snacks accounts.
Click here to view a chart with common meals and entertainment categories, and the deductibility of each category for tax purposes. Note that effective for tax years 2021 and 2022, the recently-passed COVIDTRA allows for a 100% tax deduction for expenses for food or beverages provided by a restaurant.
What hasn’t changed? Meals with clients and others for business purposes still require substantiation (the amount, time and place, business purpose, and business relationship).
Cray Kaiser is here to help if you have further questions about the meals and entertainment deductions. Please contact us today at 630-953-4900.
Please note that this blog is based on laws effective in January 2021 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Following the results of the Georgia runoff elections, we know that the Democrats hold the majority in Congress. As a result, there is a lot of speculation about President-Elect Biden’s tax plan and what changes we can potentially expect in the future. In this audio blog, CK Principal Karen Snodgrass addresses the speculation and how you can prepare:
Of course, we don’t know exactly what will happen in the coming months. With a new administration and the pandemic still surging, there is a lot at play. Rest assured, as developments occur, we’ll be sure to keep you informed on our blog. In the meantime, you can listen to Karen’s insights and predictions below:
If you have any questions about President-Elect Biden’s tax plan, please don’t hesitate to contact Cray Kaiser today.
Please note that this blog is based on laws effective on Friday, January 15 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
