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In this audio blog, CK Principal Karen Snodgrass walks us through the complexities of Illinois taxes. If you live and/or own a business in Illinois, you know that taxes have continued to rise. To put it simply, it’s a tough time to be a resident. That’s why many individuals and companies are looking for ways to move out of state and reduce their tax burden.
But is it as simple as moving out of Illinois? Unfortunately, it’s not. There are many steps required to establish domicile in a new state, and even then, Illinois will look for ways to keep taxing you. So, if you’re one of many residents considering a move out of Illinois, listen to the audio blog below to learn more about what that entails:
If you have questions about your tax situation, please don’t hesitate to contact Cray Kaiser today.
You likely already know that the tax code places limits on the amounts that individuals can gift to others (as money or property) without paying taxes. This limit is meant to keep individuals from using gifts to avoid the estate tax that is imposed upon inherited assets. It can be a significant issue for family-owned businesses when the business owner dies, and the business has to be sold to pay the resulting inheritance (estate) taxes. This is, in large part, why high-net-worth individuals invest in estate planning.
Current tax law provides both an annual gift-tax exemption and a lifetime unified exemption for the gift and estate taxes. Because the lifetime exemption is unified, gifts that exceed the annual gift-tax exemption reduce the amount that the giver can later exclude for estate-tax purposes.
This inflation-adjusted exemption is $15,000 for 2020. Thus, an individual can give $15,000 each to an unlimited number of other individuals (not necessarily relatives) without any tax ramifications. However, unlimited amounts may be transferred between spouses without the need to file such a return – unless the spouse is not a U.S. citizen. Gifts to noncitizen spouses are eligible for an annual gift-tax exclusion of up to $155,000 in 2020.
For example, Jack has four adult children. In 2020, he can give each child $15,000 ($60,000 total) without reducing his lifetime unified exemption or having to file a gift tax return. Jack’s spouse can also give $15,000 to each child without reducing either spouse’s lifetime unified exemption. If each child is married, then Jack and his wife can each also give $15,000 to each of the children’s spouses (raising the total to $60,000 given to each couple) without reducing their lifetime unified tax exemptions. The gift recipients are not required to report the gifts as taxable income and do not even have to declare that they received the gifts on their income tax returns.
If any individual gift exceeds the annual gift-tax exemption, the giver must file a Form 709 Gift Tax Return. However, the giver pays no tax until the total amount of gifts in excess of the annual exemption exceeds the amount of the lifetime unified exemption. The government uses Form 709 to keep track of how much of the lifetime unified exemption that an individual has used prior to that person’s death. If the individual exceeds the lifetime unified exemption, then the excess is taxed at the current rate of 40%.
The gift and estate taxes have been the subject of considerable political bickering over the past few years, particularly the asset value at which estate tax should apply. In 2020, the lifetime unified exemption is $11.58 million per person. By comparison, in 2017 (prior to the recent tax reform), the lifetime unified exemption was $5.49 million.
This history is important because the exemptions can change significantly at Congress’s whim. For this reason, individuals have been hesitant to make large gifts as there was concern that the gifts could be “clawed back” into their estate if the estate tax limits were reduced in the future. However, the IRS recently came out with guidance to alleviate these concerns and provide a significant planning opportunity for donors. According to the IRS, “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.”
For example, a wealthy donor may be hesitant to gift $10 million, although that amount gifted would be under their lifetime exemption and thus not taxable. The concern is that a new administration would only allow for a $5 million estate tax; meaning half of the gift would remain in his estate. Under new IRS guidance, no matter when the person dies the full amount would remain exempt, even if the exclusion is reduced in the future.
With the additional clarification of the lifetime gift exclusion availability for future estates, wealthy donors should strongly consider ensuring that their gifting strategy maximizes future tax benefits.
All donors, wealthy or not, should be cognizant of other gift tax exclusions such as certain gifts of medical expenses and tuition. When planned for correctly, these gifts are nonreportable and do not count against an annual or lifetime exclusion.
Cray Kaiser is here to help you understand the complexities of gift tax and estate tax. Please contact us at 630-953-4900 if you’d like to discuss your personal gifting strategy.
The CK team gets many calls about crowdfunding and the taxability around the money raised. We recently shared a blog about the basics of crowdfunding, specifically for nonprofits, but wanted to elaborate a little more about the tax implications and tax consequences of crowdfunding.
Many crowdfunding platforms such as GoFundMe, Kickstarter and Indiegogo have fees ranging from 5% to 9%. Each platform specifies its own charges, limitations, and withdrawal processes. And in addition to those fees, funds raised may be taxable, depending on the purpose of the campaign. Here’s how each type of crowdfunding goal is taxed:
When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient.
On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $15,000 to a particular fundraising effort that benefits one individual. In that case, the contributor is required to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax deductible.
A “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; thus, if the amount is over $15,000, the fundraiser is required to file a gift tax return and reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds which keeps the fundraiser from encountering any gift tax problems.
Gifts to specific individuals, regardless of the need, are not considered a charitable contribution under tax law (i.e. raising funds to help pay for someone’s funeral expenses). Another example, which includes a little tax twist, would be raising money to help someone pay for their medical expenses. Because it is a gift, it is not taxable to the recipient, but if the recipient itemizes their deductions, any amount of the gift the recipient spends to pay for their or a spouse’s or dependent’s medical expenses can be included as a medical expense on the recipient’s Schedule A.
Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:
Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be provided.
When raising money for business projects, two issues must be contended with: 1) the taxability of the money raised and 2) the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.
Maybe. It depends on the aggregate number of backers contributing to the fundraising campaign and the total amount of funds processed through third-party transaction companies (i.e. credit card, PayPal, etc.). These third-party processors are required to issue a Form 1099-K reporting the gross amount of such transactions. There is a de minimis reporting threshold of $20,000 or 200 reportable transactions per year. It all depends on if the third party follows the de minimis rule.
If you have questions about crowdfunding-related tax issues, please contact Cray Kaiser today.
Beginning January 1, 2020, Illinois has a new Minimum Wage Credit. Below is key information on the credit and you can click here to read full details.
Employers with 50 or less full-time equivalent employees and that have employees that had been earning less than the required minimum wage but are now being paid the required minimum wage.
The Minimum Wage Credit will be allowed against the Illinois withholding tax liability of employers.
The maximum credit is 25% and will decrease each year in the future. As Cray Kaiser knows more about the credit in the future, we’ll keep you informed.
It’s important to make sure your HR is tracking employees’ pay to determine each person’s eligibility. Alternatively, if you are using an outside payroll provider, inquire as to whether they will track this for you.
For more information on the Minimum Wage Credit, please click here. If you have any questions about this credit, please don’t hesitate to contact Cray Kaiser today.
Please note that this blog is based on tax laws effective in January 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Which employer-offered benefits are you taking advantage of? Do you know all of the benefits available to you? Not only do many employer-offered benefits provide impactful resources to you and your family, but some save you significant money and taxes. Below is a list of benefits that your employer may offer and the tax benefits of each. If you’re unsure of what is available to you, we recommend asking your employer for more information.
For a company that has 50 or more employees, the Affordable Care Act (Obamacare) requires the business to offer at least 95% of its full-time employees and their dependents (but not spouse) with affordable minimum essential health care coverage or be subject to a penalty. If you work for one of these larger employers and the company picks up the entire health insurance premium cost, consider yourself lucky, as the costs of health insurance coverage have risen dramatically over the last few years.
The tax-free benefit of what the employer covers is valuable. If you aren’t aware of the value of this nontaxable employee benefit, you can look at your Form W-2, box 12a, code DD, which shows your share of the cost of employer-sponsored health coverage.
Although some larger employers may provide a company-funded retirement plan that will pay you a monthly benefit when you retire, most generally offer 401(k) plans with which an employee can save for retirement by making pre-tax contributions of up to $19,500 for 2020. And if the employee is age 50 or over, they can qualify to make a catch-up contribution of up to $6,500, bringing the total to $26,000. Some employers also match their employees’ contributions up to a certain amount, which means an employee should endeavor to contribute at least the amount that the employer will match.
Certain transportation-related fringe benefits that an employer may provide to employees are tax-free to the employee, and the employer can deduct the cost. For 2020, the limit on tax-free employer reimbursements is $270 per month each for qualified parking, transit passes, and commuter transportation.
This is a special account established by an employer that allows employees to contribute to the account through salary-reduction contributions. The benefit is that the contributions are pre-tax, meaning the employee doesn’t pay taxes on the money contributed to the account. The FSA account can be used to pay for health plan deductibles, co-payments, and even some over-the-counter-medications with pre-tax dollars. The annual limit on contributions is inflation adjusted and is $2,750 for 2020. However, if you don’t use the money in your FSA, you’ll lose it.
The cost for the first $50,000 of group term life insurance (GTLI) coverage provided by an employer is excluded from the employee’s taxable income. However, the employer-paid cost of group term coverage in excess of $50,000 is taxable income to the employee, even if he or she never receives it.
An employee doesn’t have to include in his or her income amounts paid by the employer for educational assistance under a qualified education-assistance program. The maximum amount of educational assistance that an employee can exclude is $5,250 for any calendar year. Excludable assistance under a qualified plan includes, among others, tuition, fees, books, supplies, and equipment. The education is any training that improves an individual’s capabilities, whether or not it is job-related or part of a degree program.
An employee may exclude amounts paid or expenses incurred by the employer for qualified adoption expenses connected to the employee’s adoption of a child, if the amounts are furnished under an adoption-assistance program in existence before the expenses are incurred. If the adopted child is a special needs child, the exclusion applies regardless of whether the employee actually has adoption expenses. The maximum exclusion amount is inflation adjusted annually and is $14,300 for 2020 per child, for both non-special needs and special needs adoptions. The exclusion is phased out when the employee’s modified adjusted gross income is between $214,520 and $254,520 for 2020. Taxpayers can claim a tax credit for qualified adoption expenses, subject to the same phaseout range as for the exclusion, but any excludable employer-paid expenses can’t be used for the credit.
Qualified payments made or reimbursed by an employer on behalf of an employee for child and dependent care assistance are excluded from the employee’s gross income. The amount of the exclusion is limited to the lesser of $5,000 ($2,500 for married individuals filing separately), the employee’s earned income, or the income of the employee’s spouse. A child and dependent care tax credit is available to taxpayers, but no credit is allowed to an employee for any amount excluded from income under his or her employer’s dependent care assistance program.
Employees who have a high-deductible health plan through their employer can open a health savings account (HSA) and make annually inflation-adjusted pre-tax contributions, which, for 2020, can be up to $7,100 for families and $3,550 for a single individual. When distributions are made for medical expenses, the money comes out tax-free. However, distributions not used to pay qualified medical expenses are taxable, and if the plan’s owner is under the age of 65, nonqualified distributions are subject to a 20% penalty. Some individuals let the account grow and treat it as a supplemental retirement plan, waiting until after age 65 to begin taking taxable but penalty-free distributions.
If you have any questions about how employer-offered benefits might apply to you or if you are an employer interested in providing any of these benefits to your employees, please contact Cray Kaiser.
Tax debt can quickly snowball from interest, penalties, late fees, and the amount of the taxes due. And if you have unpaid taxes that you haven’t yet been making payments toward, it might make you fearful that the IRS will come knocking one day. However, a lot of the scaremongering surrounding the IRS is largely sensationalized in media and daily conversation. Rest assured, agents won’t come bursting through your door just because you have tax debt. In reality, they must follow due process in accordance with the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA). This means that you will always receive written notice concerning your balance due as well as collection actions and any requests for payment plans or settling your account.
However, if you haven’t received further notification concerning what you owe, you may be able to ride out the little-known statute of limitations on tax debt collections, which is 10 years.
What the 10-Year Statute of Limitations Entails
Your tax debt can actually be canceled in 10 years if the IRS makes no efforts to collect on your account — and if you also don’t contact the IRS. However, it’s not as simple as just waiting a decade without ever paying the taxes you owe. There are conditions that must be satisfied. The first is that this 10-year time frame doesn’t begin when you filed that tax return with a balance due or when you realized you owed taxes you couldn’t pay.
The official statute of limitations date begins once you receive written notice from the IRS concerning what you owe. You may receive a notice of deficiency with an actual tax bill or a substitute tax return if you didn’t file by the due date. So, if you filed your tax return on June 15, 2023, and got a notice in the mail dated September 1, your statutory period would begin September 1, not June 15. This date is called the Collection Statute Expiration Date (CSED), and if you make it to September 1, 2033, without further collection actions, then you can actually get your entire tax bill from this period canceled. (Note: Future tax bills, such as next year’s taxes you also can’t afford to pay on the due date, do not count toward this.)
However, the IRS will not actively notify you of this. While the date of assessment is also generally when that notice is received, the IRS has argued over when the assessment date actually was. Some situations can also delay the CSED by halting the clock on the 10-year time frame, such as:
It takes six months after bankruptcy cases settle to get the clock restarted on the CSED, so this means the IRS has more time to take collection actions against you, and the IRS will tend to ramp up these efforts before the statute of limitations expires.
When you access your tax account transcript through your IRS Online Account [Hyperlink: https://www.irs.gov/payments/your-online-account], the transcript will indicate the earliest CSED associated with each tax debt. However, this is only a tentative estimate of the earliest possible date. The IRS can change this date based on the circumstances listed above, and you may also challenge the date through a formal process if you believe it is incorrect.
State Tax Debt
Unlike the IRS, state tax departments do not have reciprocity with the RRA or the Taxpayer Bill of Rights. Taxpayers who are subject to state income tax need to find out what options, if any, are offered by their state tax department, and they may actually take harsher collection actions. They can do this because many state departments do not have oversight committees. They also generally do not offer taxpayers the option to settle back taxes or make payment plans, and many do not have a statute of limitations on collections. The IRS tends to get a bad rap in movies and on TV, but it’s actually the state tax departments that are more likely to show up unannounced.
It’s very rare that anyone rides out the statute of limitations on unpaid taxes, and it’s usually due to extenuating circumstances like disability or a debilitating business closure. If enough time has passed that you think you might be able to go the whole 10 years without payments or responses to collection actions, you must keep fastidious records of all correspondence with the IRS. If the IRS sent you little or no mail in the time period after the time you think the CSED kicked off, you may qualify for the statute of limitations, but you should not intentionally try to ride it out without the guidance of a tax professional specializing in tax relief and resolution issues. Please contact Cray Kaiser today if you have any questions relating to unpaid taxes or your tax situation. We’re here to help.
Please note that this blog is based on tax laws effective in December 2023, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
As the end of the year approaches and the holiday season brings on the spirit of giving, we will all see an uptick in the number of charitable solicitations arriving in our inboxes. And since some charities sell their contributor lists to other charities, frequent contributors may find themselves besieged by requests from unfamiliar organizations.
As a result, here are three tips to keep in mind as you make charitable contributions:
Be careful. Scammers are out there pretending to be legitimate charities. And they’re looking to take advantage of your generosity for their gain.
When making a donation to a charity with which you’re unfamiliar, you should take a few extra minutes to ensure that your gifts are going to a good cause. The IRS has a search feature, the Tax Exempt Organization Search, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. Note that you can always deduct gifts to churches, synagogues, temples, mosques, and government agencies — even if the Tax Exempt Organization Search tool does not list them in its database.
More and more, organizations and communities are also using crowdfunding campaigns to fundraise and connect with potential donors. While the vast majority of these campaigns are legitimate, be aware that not all crowdfunding donations are tax deductible. If a qualifying charity or religious organization is behind the campaign and receiving the funds, your donation will likely be treated as a regular tax-deductible contribution. But if an individual, business, or anything else that’s not a charity is receiving the funds, then the IRS would treat the donation as a non-deductible gift rather than a deductible contribution. Common examples of non-deductible gifts would be for campaigns to raise funds for a community members’ medical expenses, or to help local businesses recover from natural disasters. These campaigns may be worthy of support, but they are not tax deductible unless backed by a qualified charity.
Here are some other ways to ensure your contributions go to legitimate charities:
Contributions to charitable organizations are deductible if you itemize your deductions on Schedule A. Generally, the deduction is the lesser of your total contributions for the year or 50% of your adjusted gross income. However, the 50% is increased to 60% for cash contributions in years 2018 through 2025. Lower percentages may apply for non-cash contributions and contributions to certain types of organizations. Itemized deductions reduce your gross income when determining your taxable income.
However, with the increase in the standard deduction as a result of the 2017 tax reform, many taxpayers are no longer itemizing their tax deductions (because the standard deduction provides a greater tax benefit). For those in this situation, there are two possible workarounds:
Bunching Deductions: As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next. Click here to learn more about bunching.
Qualified Charitable Distributions: Individuals age 70½ or older – who must withdraw annual required minimum distributions (RMDs) from their IRAs – are allowed to annually transfer up to $100,000 from their IRAs to qualified charities. Here is how this provision works, if utilized:
1) The IRA distribution is excluded from income;
2) The distribution counts toward the taxpayer’s RMD for the year; and
3) The distribution does NOT count as a charitable contribution deduction.
At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps with other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses when itemizing deductions, passive losses, and taxable Social Security income. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.
Charitable contributions are not deductible if you cannot substantiate them. Forms of substantiation include a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter) showing the charity’s name, the date of the contribution, and the amount of the contribution. In addition, if the contribution is worth $250 or more, the donor must also get an acknowledgment from the charity for each deductible donation.
Non-cash contributions are also deductible. Generally, contributions of this type must be in good condition, and they can include food, art, jewelry, clothing, furniture, furnishings, electronics, appliances, and linens. Items of minimal value (such as underwear and socks) are generally not deductible. The deductible amount is the fair market value of the items at the time of the donation; as with cash donations, if the value is $250 or more, you must have an acknowledgment from the charity for each deductible donation.
Note that the door hangers left by many charities after picking up a donation do not meet the acknowledgement criteria; in one court case, taxpayers were denied their charitable deduction because their acknowledgement consisted only of door hangers. When a non-cash contribution is worth $500 or more, the IRS requires Form 8283 to be included with the return, and when the donation is worth $5,000 or more, a certified appraisal is generally required.
Special rules also apply to donations of used vehicles when the claimed deduction exceeds $500. The deductible amount is based upon the charity’s use of the vehicle, and Form 8283 is required. A charity accepting used vehicles as donations must provide Form 1098-C (or an equivalent) to properly document the donation.
No matter what time of year you find yourself making charitable contributions, we encourage you to do it responsibly. Unfortunately, there are complexities when it comes to the spirit of giving and there are individuals out there who are looking to take advantage of well-intentioned people. If you have any questions related to charitable giving, please contact Cray Kaiser today. We’d be happy to help!
Please note that this blog is based on tax laws effective in December 2023, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
As you fill your shopping cart this holiday season you might be wincing at the price tag of some of the presents for your family and friends. But did you know that certain holiday gifts can yield tax benefits? While your online shopping won’t help minimize your taxes, larger gifts can go a long way in bringing you benefits in 2020. Here are a few examples:
If you’re an employer you may purchase gifts this time of year for your team members. If the gift is infrequently offered and has a fair market value so low that it would be impractical to account for it, the gift’s value would be treated as a de minimis fringe benefit. Therefore, it would be tax-free to the employee and tax-deductible by the employer.
Note that a gift of cash, regardless of the amount, is considered additional wages and is subject to employment taxes (FICA) and withholding taxes. Gift certificates, debit cards, and other items that are convertible to cash are also considered additional wages, regardless of the amount. Furthermore, if the employee receiving a cash gift is a W2 employee, the employer cannot issue a 1099-MISC. The cash amount must be treated as W2 income.
Did you know that according to gift tax laws, any individual can pay a student’s tuition directly to a qualified school or university, and it will be exempt from gift tax and gift tax reporting? What student wouldn’t love to have part of his or her tuition paid? It would make a great gift.
As an aside, college tuition generally qualifies for a tax credit. Another quirk in the tax laws says that the education credit goes to the individual who claims the child as a dependent, resulting in another gift from the noncustodial individual who pays the tuition.
Here’s an example: Whitney is attending college and is the dependent of her mother and father. Whitney’s grandfather makes a tuition payment directly to her college and therefore has no gift tax issues. And since Whitney is a dependent of her parents, her parents can claim any available tuition credit. Thus, by paying the tuition, her grandfather made a gift of tuition to his granddaughter and a gift of the tuition credit to her parents.
If you purchase an electric car as a holiday gift for your spouse or even yourself, you will find that most electric cars come with a tax credit. To qualify to claim the credit on your 2019 tax return, the car will have to be “placed in service” by December 31, 2019. So merely ordering the vehicle, even if payment for it is made at the time when the order is placed, won’t be enough. You will need to receive the car and start using it before New Year’s Day.
But before you take the leap, be sure to research the credit available for the electric car you are looking at purchasing. Some credits affiliated with popular electric vehicles may have already expired or have been reduced.
You should also know that the credit is non-refundable for vehicles used strictly for personal use, meaning it can only offset your actual tax liability; any excess credit over your tax liability will be lost. Electric cars used in a business have less stringent tax liability limitations.
Of course, contributions to qualified charitable organizations can be deducted, provided you itemize your deductions. If you are over age 70.5 and have not taken your required minimum distribution (RMD) from your IRA account for 2019, you might consider making direct transfers to the charities of your liking, thereby satisfying your RMD requirement while avoiding taxation of the distribution. Contact your IRA custodian or trustee to arrange the transfer, which would need to be completed by December 31, 2019 to count for 2019.
Some words of caution about charitable contributions during the holiday season: When you are shopping at a mall and drop cash into the holiday kettle, you won’t get a receipt for your contribution, and a cash charitable contribution cannot be claimed as an itemized deduction without documentation. The same goes for buying and then giving new, unused toys to holiday toys-for-kids drives, which have become very popular. In this case, save the purchase receipt for the toys and request verification of the contribution from the sponsoring organization. If the drop point is unmanned and it is not possible to obtain a contribution verification from the organization, the IRS will allow a deduction of up to $249, provided you document the purchase of what you’ve donated.
‘Tis the season for holiday shopping (and tax benefits)! If you have questions about how these suggestions might impact your tax situation, please give us a call at 630-953-4900.
Please note that this blog is based on tax laws effective in November 2019, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Over the last few decades, Master Limited Partnerships (MLPs) have gone mainstream. But what are MLPs? They are companies structured as partnerships and traded on the stock exchanges. You can buy units of the partnership as easily as you can buy common stock.
In order to be a classified as an MLP, the partnership needs to meet two qualifications:
1) The partnership must operate in an industry such as energy or natural resources
2) The partnership must distribute at least 90% of its income to its unitholders
By distributing more than 90% of its income the partnership avoids double taxation, which occurs when tax is paid by corporations first and capital gains tax is paid by individuals on dividends received. With MLPs, the partnership does not pay corporate tax and distributions to the unitholder will be higher because the tax is only paid once at the unitholder level.
At year-end you will receive Form K-1 from the MLP, which allocates income based on your ownership percentage. Since these MLPs operate in a capital-intensive sector, most of the income that is allocated will in many cases be losses, due to the high rate of depreciation. And since you are considered a limited owner of the MLP, these losses will be deferred until you sell your units. On the other hand, the distributions are considered a return of capital and not taxed until you sell your units.
As you can imagine, investing in MLPs introduces more complexity in the preparation of your taxes. In addition to Form K-1, you will be required to individually report each K-1 on your tax return. And the sale of any units in the MLP will require you to determine ordinary and capital portions of any gains, as both have different tax rates.
It is generally recommended that MLPs are held in taxable accounts because any distributions over $1,000 in a retirement account could result in Unrelated Business Taxable Income (UBTI) tax. This is a special tax accessed by the IRS and would cause additional fees charged by your brokerage. Both of these would reduce the appeal of the MLP structure.
If you are interested in MLPs but don’t want to conduct in-depth research or deal with the complexity of tax preparation, you can find Exchange Traded Funds (ETFs) that will circumvent K-1 reporting and diversify company risk. However, keep in mind that the ETFs will be treated as a common stock, which would result in double taxation.
Master Limited Partnerships are complicated in nature and have various tax implications and strategies. If you need guidance on your MLP or EFT, please call Cray Kaiser for assistance.
Please note that this blog is based on tax laws effective in October 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
There are a multitude of ways that technology has turned our world upside down. One of the most recent examples is cryptocurrency. And it’s inevitable that as cryptocurrency gains more traction, it will gain more attention from the IRS. The Service already knows that many cryptocurrency owners are not reporting or paying taxes on their cryptocurrency transactions. In fact, the IRS recently issued warning letters to over 10,000 taxpayers it suspects might have an under-reporting problem. So, if you own cryptocurrency, please keep reading for important information.
Cryptocurrency is a form of digital money that is not controlled by any central authority. The first cryptocurrency created was Bitcoin, back in 2009. Since then, over 4,000 other cryptocurrencies have been created. Cryptocurrency can be digitally traded between users and can be purchased for, or exchanged into, US dollars, euros, and other real or virtual currencies.
One of the big issues surrounding cryptocurrency is how it is treated for tax purposes. The IRS says that it is property, which means that every time it is traded, sold or used as money in a transaction, it is treated much the same way as a stock transaction would be. In other words, the gain or loss over the amount of its original purchase cost must be determined and reported on the owner’s income tax return. That treatment applies every time it is sold or used as money in a transaction.
On the bright side, cryptocurrency is generally treated as a capital asset for most holders, so any gain is a capital gain. If the gain is held for more than a year and a day, any gain will be taxed at the more favorable long-term capital gains rates. If the cryptocurrency is being held as an investment and the sale results in a loss, then the loss may be deductible. Capital losses first offset capital gains during the year, and if a loss remains, taxpayers are allowed a $3,000 per year loss deduction against other income, with a carryover to the succeeding year(s) if the net loss exceeds $3,000.
When cryptocurrency is used as payment to an employee, the usual payroll withholding and reporting still apply, and if used to make payments to an independent contractor, 1099 form reporting is still required. If the individual receiving payment in cryptocurrency is subject to backup withholding, the payer is required to withhold the required amount. In all reporting and withholding instances, the amounts must be in US dollars.
If you have received one of the 10,000 letters sent out by the IRS, do not ignore it! The IRS compiled this list of taxpayers that it feels has not been reporting their cryptocurrency transactions from various ongoing IRS compliance efforts. Here are the three types of letters that were sent out and what you should do if you received it:
The IRS has announced that it will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits and criminal investigations.
Taxpayers who do not properly report the income tax consequences of virtual currency transactions are liable for the tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.
If you have received one of these IRS letters – or even if you haven’t had correspondence from the IRS but have unreported cryptocurrency transactions from past years – and need assistance, please contact Cray Kaiser. We’re here to help!
Please note that this blog is based on tax laws effective in October 2019, and may not contain later amendments. Please contact Cray Kaiser for most recent information.