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Member of Russell Bedford International, a global network of independent professional service firms.
If you haven’t received your tax refund yet you are not alone. We have heard several reports from clients who are still waiting on refunds from returns filed early in the year. Unless there is an error, the IRS will typically issue most refunds in less than 21 calendar days. However, 2021 is far from a typical year for a number of reasons.
COVID-19 – The IRS computer system can only be accessed from IRS facilities. So, unlike most other employers that had to deal with the COVID-19 outbreak, IRS employees could not work from home. Consequently, during 2020 and 2021 many IRS employees were furloughed. And the IRS got significantly behind in processing returns, especially paper-filed returns that must be input manually. As a result, the IRS was still processing 2019 returns at the beginning of the 2020 return filing season.
Economic Impact Payments – Congress ordered the IRS to handle the task of issuing three economic impact payments, two in 2020 and one in 2021, further tapping IRS resources.
Recovery Rebates – To make matters worse, those first two economic impact payments had to be reconciled on the 2020 tax return. If a taxpayer didn’t receive the amount they were entitled to, they were allowed an equivalent recovery rebate credit on their tax return.
If there is a discrepancy between the amount of the payments reported on the tax return and what the IRS has on file for the economic impact payment amounts, the IRS is manually verifying the tax return for credit eligibility. This is causing additional refund delays.
Unemployment Debacle – In March 2021, after the 2020 tax filing season had gotten underway and millions of taxpayers had already filed their returns, Congress decided to make a portion of the unemployment compensation taxpayers received in 2020 tax-free. To avoid millions of amended returns from being filed, the IRS has undertaken the task of automatically adjusting those returns and issuing refunds.
Using 2019 Income to Compute 2020 EITC and Additional Child Tax Credit – The EITC and the additional child tax credit are based on a taxpayer’s earned income (income from working). However, because a preponderance of those who normally benefited from EITC and the additional child tax credit were unemployed during 2020, Congress allowed the 2019 earned income to be used in computing those credits for 2020, which also is causing processing delays.
You can use the IRS’s online tool “Where’s My Refund” to determine the status of your refund. To use that tool, you will need:
Generally, the IRS will pay interest on the refund due to you starting from the later of the following:
The IRS stops paying interest on overpayments on the date they issue the refund, or it is used to offset an outstanding liability.
Currently, the interest rate the IRS pays individuals on overpayments is 3%; the rate is adjusted quarterly but has been at 3% since July 1, 2020.
Exception: No overpayment interest is paid if the IRS issues the refund within 45 days of the return due date, or actual filing date if later.
As you can see, refunds are not being issued as quickly as they were pre-COVID and there isn’t anything a tax preparer or taxpayer can do about the IRS not paying out refunds once a return is electronically filed and accepted by the IRS.
Cray Kaiser is here to help if you have further questions about your tax refund. Please contact us today or call (630)953-4900.
With mortgage rates at an all-time low, many people are exploring and undertaking the task of buying houses, renovating, making improvements, and selling them for hopefully more than their cost. This could be a profitable endeavor, however, there are tax consequences that should be factored in so you can generate expected returns.
The tax treatment varies based on how you are categorized by the IRS. You can be considered a dealer, investor, or homeowner, all summarized below. In some instances, it is clear cut what you would be treated as, and in some other cases, you would need to discuss with a tax professional.
Dealer in Real Estate
This category is akin to running a business, but without a separate corporate return. The gains are taxed at ordinary taxpayer rates. Since it is considered a business, the taxpayer would be subject to self-employment taxes of 15.3% of the net profit. For high income taxpayers, an additional 0.9% Medicare surcharge would be assessed on the net profit. In general, a dealer would pay more in taxes than an investor would. The upside is that any losses from real estate transactions are considered ordinary and would be fully deductible in the year the loss originates.
Investor
Gains on the home sale are subject to capital gains treatment. If the property is held for more than a year, then the long-term rates would be a maximum of 20% of the gain. If the property is sold within the year, then it would be subject to short-term rates, which would be equivalent to the ordinary tax rate of the taxpayer. For high income taxpayers, there is also an additional 3.8% surtax on the net investment gain. The benefit of being considered an investor is no self-employment tax nor Medicare surcharge is assessed. However, if for any instance you sell the property at a loss, the loss is netted against any other capital gains. If the losses are greater than capital gains in any given year, then the loss is capped at $3,000 with the remainder carried forward and utilized in the following year(s).
Homeowner
There are some benefits if you are considered a homeowner. If you were to live in the property while it is being fixed up and consider it a primary residence, and if you meet the following criteria, you could exclude the gain (up to $250,000 for individuals and $500,000 for married filing jointly) from your income.
Please be aware that if you incur a loss, then none of it will be deductible. In addition, some fix-up costs might be considered repairs instead of improvements, and as a residence, not deductible or contributing to the increase of the cost of your home. Finally, the two-year rules make it difficult to be continuously flipped and getting the homeowner exclusion.
Being a homeowner is easily identifiable, but the classification between investor and dealer might be harder to identify. The distinction between a dealer and an investor is based on the facts and circumstances of each case. The IRS and Tax Court have taken the following into consideration in determining if the taxpayer is a dealer or an investor:
Note that there is a provision in the current tax code for like-kind exchanges (known as Section 1031 transaction), which allows the taxpayer to defer taxes if they purchase another similar property in a defined time frame. This is a complicated transaction, which only applies to investors or dealers in real estate, and would need to be structured correctly to provide Section 1031 benefits.
Cray Kaiser is here to help if you have further questions about your real estate activities. Please contact us today at 630-953-4900.
Selling a property one has owned for a long period of time will frequently result in a large capital gain. Reporting all of the gain in one year will generally expose it to higher-than-normal capital gains rates and subject the gain to the 3.8% surtax on net investment income. With higher capital gains tax rates potentially on the horizon, it’s important to know your options for deferring tax on gains. One of those deferral opportunities is what’s known as an installment sale. An installment sale could fend off taxes imposed at higher levels of income by spreading the income over multiple years.
Here is how it works. If you sell your property for a reasonable down payment and carry the note on the property yourself, you only pay income taxes on the portion of the down payment (and any other principal payments received in the year of sale) that represents taxable gain. You can then collect interest on the note balance at rates near what banks charge. For a sale to qualify as an installment sale, at least one payment must be received after the calendar year in which the sale occurs. Installment sales are most frequently used when the property that is sold is real estate and cannot be used to report the sale of publicly traded stock or securities.
Example: You own a lot for which you originally paid $10,000. You paid it off some time ago, leaving you with no outstanding mortgage on the lot. You sell the property for $300,000 with 20% down and carry a $240,000 first trust deed at 3% interest using the installment sale method. No additional payment is received in the year of sale. The sales costs are $9,000.
Of the $60,000 down payment you received, $9,000 went to pay the selling costs, leaving you with $51,000 cash. The 20% down payment is 93.67% taxable, making $56,202 ($60,000 x .9367) taxable the first year. The amount of principal received and reported each subsequent year will be based upon the terms of the installment agreement. Additionally, the interest payments on the note are taxable and also subject to the investment surtax.
Thus, in the example, by using the installment method the income for the year was reduced by $224,798 ($281,000 – $56,202). The impact on the taxpayer’s overall tax liability depends on the taxpayer’s other income and circumstances.
Here are some additional considerations when contemplating an installment sale.
Existing mortgages – If the property you are considering selling is currently mortgaged, that mortgage must be paid off during the sale. Even if you do not have the financial resources available to pay off the existing loan, there may be ways to work out an installment sale by taking a secondary lending position or wrapping the existing loan into the new loan.
Tying up your funds – Tying up your funds into a mortgage may not fit your long-term financial plans, even though you might receive a higher return on your investment and potentially avoid a higher tax rate and the net investment income surtax. Shorter periods can be obtained by establishing a note due date that is shorter than the amortization period. For example, the note may be amortized over 30 years, which produces a lower payment for the buyer but becomes due and payable in 5 years. However, a large lump sum payment at the end of the 5 years could induce the higher tax rate and surtax to apply to the seller in that year. So pay close attention to the tax consequences when structuring the installment agreement.
Early payoff of the note – The buyer of your property may decide to pay off the installment note early or sell the property, in which case your installment plan would be defeated and the balance of the taxable portion would be taxable in the year the note is paid off early or the property is sold, unless the new buyer assumes the note.
Tax law changes – Income from an installment sale is taxable under the laws in effect when the installment payments are received. If the tax laws are changed, the tax on the installment income could increase or decrease. Based on recent history, it would probably increase.
Installment sales do not always work in all situations. Contact Cray Kaiser to determine whether an installment sale will fit your particular needs and circumstances.
The start of July brings with it fireworks, corn on the cob and yes, the need to start thinking about remaining tax deadlines for 2021. This year, it is also important to start planning for the payroll deferral deadlines that are coming up at year end. For those organizations that chose to defer, there may be significant balances due so it’s important to understand when payments will be required.
Due to the COVID-19 pandemic, employers were allowed to defer the deposit and payment of the employer portion of social security taxes (6.2% rate) that would have otherwise been required for wages paid between March 27, 2020 and December 31, 2020. The deferral also applies to deposits and payments due after January 1, 2021 for wages paid during the quarter ending December 31, 2020.
The IRS is issuing reminder notices for EACH quarter the employer portion of social security taxes were deferred. Employers that deferred amounts in all four quarters of 2020 may receive up to four reminder notices, even though the amounts are all due by the same due dates. The total deferred amount for EACH quarter will be on the reminder notices, however only 50% of the amount must be paid by January 3, 2022. Deferred amounts will be treated as timely deposited and paid according to the following schedule:
An employer can begin repaying the deferred amounts at any time. Any payments or deposits that an employer makes before December 31, 2021, will be first applied against the employer’s payment due on January 3, 2022, and then applied against the employer’s payment due on December 31, 2022.
If you have any questions about the upcoming deadlines or deferred payroll taxes, please call us at 630-953-4900. We are happy to discuss further.
In this audio blog. CK Tax Manager Eric Challenger, CPA shares important tax information for independent contractors including:
Listen to Eric outline what you need to know if you are filing taxes as an independent contractor:
Note – To listen to this audio blog, please make sure you are not using Internet Explorer as your browser.
If you are an independent contractor and need help filing taxes, please don’t hesitate to contact Cray Kaiser today.
As an incentive and to help grow the organization’s market value, many companies will offer stock options to key employees. The options give the employee the right to buy a specified number of shares of the company’s stock at a future date at a specific price. Generally, options are not immediately vested and must be held for a specified period before they can be exercised. Once vested, and assuming the stock price has appreciated to a value higher than the option price of the stock, the employee can exercise the options (buy the shares), paying the lower option price for the stock rather than the current market price. This gives the employee the opportunity to participate in the growth of the company through gains from the sale of the stock without the risk of ownership.
There are two basic types of employee stock options for tax purposes, a non-statutory option and a statutory option (also referred to as the incentive stock option), and their tax treatment is significantly different.
The taxability of a non-statutory option occurs at the time the option is exercised. The gain is considered ordinary income (compensation) and is included in the employee’s W-2 for the year of exercise.
The employee has the option to sell or hold the stock he or she has just purchased, regardless of what he or she does with the stock, the gain, or the difference between the option price and market price of the stock at the time of the exercise, is immediately taxable. Because of the immediate taxation and to generate the cash necessary for purchase, most employees who have been granted options will immediately sell their stock when exercising their option. Under that scenario, the W-2 wage income will reflect the profit on the sale. Since the difference between the option price and market price is included in wages, it is also subject to payroll taxes (FICA).
Form 8949 (the tax form used to report sales of stock and other capital assets) will need to be prepared to show the sale, essentially with no gain or loss, so that the gross proceeds of sale are properly reported on the return. Although the W-2 shows the profit, the brokerage will also report the gross proceeds on Form 1099B. If there was a sales cost, such as a broker’s commission, then the result would be a reportable loss, albeit usually a small amount.
If an employee chooses to hold the stock, he or she would have to pay the tax on the difference between the option price and exercise price, plus the FICA tax, from other funds. If the stock subsequently declines in value, the employee is still stuck with the gain reported when the option was exercised. Any loss on the subsequent sale of the stock would be limited to the overall capital loss limitation of $3,000 per year.
In the taxation of a statutory options, no amount of gain is included as regular income when the option is exercised. Therefore, the employee can continue to hold the stock without any tax liability; and, if he or she holds it long enough, any gain would become a long-term capital gain taxed at a preferential rate. To achieve long-term status, the stock must be held for:
However, there is a dark side to statutory options. The difference between the option price and market price, termed the spread, is what is called a preference item for alternative minimum tax (AMT) purposes. If the spread is great enough, that might cause an additional tax liability due to the AMT. The rules surrounding AMT are complex which is why we recommend you seek the guidance of a tax advisor if you are granted incentive stock options.
With an increase in the value of stock options in 2020 and 2021, we’ve received a number of questions regarding the timing of exercising and/or selling options. While we cannot provide investment advice, we can model the tax and cash flow implications of certain actions at different stock valuations. Using a team that includes both your investment and tax advisors will ensure that you are maximizing the financial benefits of stock options.
If you are planning to exercise employee stock options and have questions or wish to do some tax planning contact us at Cray Kaiser so we can help to minimize the tax bite.
The American Rescue Plan that was signed in March 2021 made a few positive changes regarding the Child Tax Credit for taxpayers in 2021, including increased and fully refundable credits. In addition, for 2021, the IRS will make advance monthly payments of 50% of the estimated annual Child Care Credit on the 15th of each month between July and December this year. These payments will come through as direct deposit, physical check or in some cases, debit cards.
The maximum annual Child Care Credit will be $3,000 per qualifying child between ages 6 and 17 and $3,600 per qualifying child under age 6, as of December 31, 2021. In either case, the child must live with the taxpayer in the U.S. for more than half the year.
The maximum credit is available to taxpayers with a modified Adjusted Gross Income of:
$75,000 or less for single taxpayers
$112,500 or less for head of household
$150,000 or less for married couples filing jointly and qualifying widowers
The maximum credit phases out for higher income taxpayers.
The IRS is sending out letters to families who may be eligible based on the information from their 2019 or 2020 return. If eligible, the IRS will send a second letter out with personalized information, including an estimate of the monthly payment.
If no return was filed in 2019 or 2020, the IRS has created a new non-filer sign-up tool to register for the advanced child tax credit payments.
The biggest difference is that the advances received will be reconciled on your 2021 tax return using the actual 2021 modified Adjusted Gross Income. That means, unlike the stimulus payments, if you receive too much in advance payments you will owe the difference on your 2021 tax return. Likewise, if you do not receive enough in advance payments, you will receive the difference when you file your 2021 tax return. This distinction makes paying attention to the advance payments very important.
The IRS will debut a portal later in June for those families who don’t want the enhanced payments.
Cray Kaiser is here to help if you have further questions about the childcare credit and advances for 2021. Please contact us today or call (630)953-4900.
Effective July 1, 2021 certain taxing jurisdictions in Illinois have imposed a local sales tax or changed their local sales tax rate on general merchandise sales. The following taxes are affected:
To be in compliance with the new tax rates, you must adjust your point of sale and/or accounting system to ensure that you will collect and pay the correct sales tax effective July 1, 2021. You may need to contact your software vendor to confirm that they will correct their systems to the appropriate tax rate. Remember that even if you under-collect tax, the tax is still due. That means it will be your responsibility to pay the difference.
To verify your new combined sales tax rate (state and local tax), click here.
Who is impacted?
The sales tax rate change does not affect anyone collecting sales tax in the city of Chicago. However, it does affect some cities in DuPage County, Cook County and other jurisdictions. To see a full list of all the cities impacted and the new rates, please click here.
What is taxed?
These rate changes do not impact what is and is not subject to sales tax. As a reminder, most sales are subject to both the state sales tax and the locally imposed sales tax.
Note that some jurisdictions may impose and administer taxes not collected by the Illinois Department of Revenue. Contact your municipal or county clerk’s office for more information.
If you have any questions regarding the sales tax rate change, please don’t hesitate to contact Cray Kaiser today.
Investing in a franchise can be a wonderful opportunity, but it can also involve a completely unfamiliar set of rules when it comes to your taxes. Whether you are considering becoming a franchisee or have recently become involved, it’s important that you seek the right advisor to help ensure you understand your tax obligations and prepare accordingly. Here are just a few of the things that you need to keep in mind:
How you organize your franchise is going to be one of your earliest decisions, and one of your most important. From a tax perspective, your tax advisor can advise on different corporate/unincorporated structures and the tax implications of each. You should also be sure to engage an experienced franchise attorney to review legal documents related to the franchise, lease agreements, and/or bank loans. The attorney can also advise on asset protection strategies based on the organizational structure you choose.
Even though you take direction from the franchise on marketing materials, training methods, employee rules and suppliers, and many other decisions, you are still in charge of the business in ways that the IRS defines as being self-employed. You make your own schedule and establish your own community and business relationships, so the government puts you in the same category as a sole proprietor. That means you need to report your earnings on a Schedule C, just like single-member LLCs and sole proprietors do, and you need to pay the additional 15.3% tax that self-employed people are assessed.
The rules surrounding taxes on self-employed individuals are complicated, and we’ve expanded on this topic in a prior blog.
One of the advantages of being a franchisee is that you can be either an active or a passive participant. Making the decision about whether you are hands-on or simply purchasing the business and handing off the day-to-day operational responsibilities to a partner has important tax ramifications. Establishing whether your earnings are passive or active will be one of the first tasks on your tax professional’s list. By answering questions like the ones below, your advisor will be able to understand what you do and to what extent.
Franchisees that have materially participated in the business in five of the previous ten years can be determined to be active participants, regardless of their answers to the other test questions they will be asked.
If your answer is more than 500 hours, the IRS can consider you a material participant rather than a passive one.
If you worked at least 100 hours on the business and no less than anybody else, then you can be considered an active participant.
These are just a few of the IRS’s material participation tests that are used to make this important determination that impacts the way that passive losses are handled. If you are identified as passively involved, then any losses you realize as a franchisee can only be offset by other passive income. The losses can be carried forward if you don’t have enough income to offset them, but you will never be able to take the deduction of passive losses against wages, active business earnings, or other ordinary income.
It’s important to note that the passive loss rules apply whether you decide to incorporate your franchise, operate as a partnership, or as a self-employed individual.
Different types of businesses are eligible for specialized tax incentives, and if you are new to franchising you may not be fully aware of them. Here are a few that your advisor may be able to help identify for you:
As you can see, the opportunities that come with being a franchisee come with a host of tax regulations that may be unfamiliar and confusing. To set yourself up for success and avoid both confusion and the potential for penalties, contact us at Cray Kaiser so we can help you navigate and plan for this new world.
A federal tax credit for the purchase and installation costs of a residential solar system has been extended through 2023. The solar tax credit for 2021 and 2022 is 26% of the cost of the solar installation but drops to 22% for 2023, the final year of the credit (unless extended again by Congress).
When you see TV ads for home solar power, you may get the impression that Uncle Sam is going to pick up 26% of the cost, and you only have to come up with the other 74%. But that is not the whole picture. It’s true that the federal government has a 26% tax credit for the cost of a qualified solar installation (some states also have solar credits or other incentives). However, the federal credit is non-refundable and can only be used to offset your current tax liability. Any excess carries over to future years, as long as the credit still applies in future years. Currently, the credit is allowed through 2023. This means that you may not get all the credit in the first year, as you might have been led to believe.
Consider this example: In 2021, your solar installation costs $25,000. That would qualify you for a solar tax credit of $6,500. But suppose the income tax on your tax return is only $4,000. The credit would reduce your tax liability to zero, and the other $2,500 ($6,500 – $4,000) of the credit is carried over to 2022’s tax return, where the credit will be limited to that year’s tax amount. If your tax is again less than the amount of the credit, the excess credit carries to the following year, and so on, until the credit is used up or expires.
Compare the cost of the system (and the interest you will be paying, if you are financing it) to conventional electricity costs. How many years will it take to recover your cost? Do you plan to live in your home beyond that time? Is a solar system really worth the cost? Electricity costs can vary significantly according to locale.
Even if not financially beneficial, there are situations in which the cost may not be the deciding factor. Some areas experience frequent power outages, you may simply want to go green, or you may want to go off the grid where electric service is not reliable.
If you plan to move forward with a solar installation, here are some of the tax issues you need to be aware of.
Only the following solar power systems are eligible for the credit:
The credit may be claimed on the tax return of the year during which the installation is completed. For example, if you purchase and pay for a system completed in 2022, the credit will be 26% of the cost. But if the project isn’t completed until 2023, the credit will only be 22%. This becomes an even a bigger issue for systems installed during 2023 that aren’t completed before 2024, when the credit rate will be zero. So, if you plan to purchase a solar system in 2023, the purchase should be made early enough in the year to ensure the installation is completed before 2024.
There is a lot to consider before making the final decision to install a solar system. Is it worth it? Is it the right financial move for you? Please call Cray Kaiser at (630) 953-4900 before signing any contract to make sure a solar system is appropriate for you.
Please note that this blog is based on tax laws effective in March 2021 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
