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Member of Russell Bedford International, a global network of independent professional service firms.
Many taxpayers rent out their first or second homes without considering tax consequences. Even if you rent out your property using rental agents or online rental services that match property owners with prospective renters (i.e. Airbnb, VRBO, HomeAway), it is still your responsibility to properly report the rental income and expenses on your tax return. You should be aware of some special tax rules for renting your home that probably apply to you.
When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. Interest and property taxes are not prorated, and the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A.
Rentals are generally passive activities, which means that losses from these activities are generally only deductible up to the amount of gains from other passive activities. However, an activity is not treated as a rental if either of these statements applies:
If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated mortgage interest and real property taxes, will be reported on Schedule C.
If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection), and if the rental also includes maid and linen services that cost less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule.
The tax rules for renting your home can be complicated. Please call Cray Kaiser at 630-953-4900 to determine how they apply to your particular circumstances and what actions you can take to minimize tax liability and tax maximize benefits from your rental activities.
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.
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.
It has now been well over two years since the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. handed states the ability to require out-of-state companies to collect and remit sales tax. The past two years has seen a wave of new sales tax legislation by states putting into place their own standards of economic nexus.
Prior to these enactments, a business without physical presence in a state was not required to collect sales tax within that state. Now, businesses must monitor not only the amount of sales into each state, but also the number of transactions each year. The evaluation period and thresholds vary from state to state. States even differ in which sales to include in the determination of nexus; some states include all sales, while others do not include sales for resale and/or exempt sales.
To protect your business from potential sales tax assessments, you should be aware of activity that may cause sales tax nexus. Many states are sending questionnaires to companies, but completing a questionnaire without a complete understanding of sales tax nexus could open up your business to further scrutiny by the state.
Here are some things to keep in mind with respect to sales tax nexus:
If you are unsure what your nexus risks are, you should act sooner rather than later. Sales tax examinations often cover several years at a time. Cray Kaiser can help you analyze where you have exposure and advise what to do about it. Contact us today, we’re here to help.
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.
To cope with inflation, the tax code requires the IRS to adjust the tax rates, standard deductions, and a variety of other tax related numbers each year. Due to the relatively low rate of inflation from 2020 to 2021 (at least according to the calculation method prescribed by law for this purpose), several categories had no change or only a slight change. The following is a summary of the most commonly encountered inflation adjustments for 2021.
The standard deduction consists of a filing status-based basic amount and additional amounts for elderly and blind filers (and their spouses). The additional amounts do not apply to dependents. The 2020 and 2021 amounts are compared below.
Added amounts for elderly and blind:
The limit on contributions by employees who participate in Sec. 401(k), Sec. 403(b), most Sec. 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $19,500 for 2021. The catch-up contribution limit for employees age 50 and over also remains unchanged at $6,500.
The contribution limit for SIMPLE retirement accounts remains unchanged at $13,500 for 2021.
For IRAs, the limit on annual contributions remains unchanged at $6,000 for 2021 and the additional catch-up contribution limit for individuals age 50 and over is $1,000. This limit applies to the combination of traditional and Roth IRAs. However, there are additional limitations that apply to both traditional and Roth IRAs.
Traditional IRA: Typically, contributions to a traditional IRA are tax deductible, unless the taxpayer is also an active participant in an employer plan. In that case, the deductibility of the contribution is phased out for higher income taxpayers. The phaseout thresholds have increased somewhat for 2021:
Roth IRA Contributions: Roth IRA contributions are phased out for higher income taxpayers whether or not they actively participate in an employer’s plan. The AGI thresholds limiting Roth IRA contributions have been increased slightly for 2021:
The amount of the estate tax exclusion for a decedent passing away in 2021 has increased to $11.7 million, up from $11.58 million in 2020.
The annual gift exclusion amount is unchanged. The first $15,000 of gifts (other than gifts of future interests in property) to any person in 2021 is exempt from the gift tax. 2021 is the fourth consecutive year that this exclusion has been $15,000.
The Internal Revenue Code allows a business taxpayer to expense, limited to taxable income from all of the taxpayer’s active trades or businesses, rather than depreciate, certain property used in business. For 2021 the maximum is $1.05 million ($525,000 for married taxpayers filing separate), up from $1.04 million in 2020. The phaseout threshold based on the cost of Sec 179 property also increased to $2.62 million, up from $2.59 million.
Each year inflation adjustments are also made to tax rate schedules. Click here to view the schedules for 2021.
The optional vehicle mileage rates for 2021 will not be released until later in the year or early in 2021. Please check back for an update.
If you have any questions about inflation adjustments for 2021, please contact Cray Kaiser today. We’re here to help!
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.
If your business engages the services of an individual (i.e. independent contractor), other than one who meets the definition of an employee, and you paid him or her $600 or more for the calendar year, then you are required to issue that person a Form 1099-NEC or 1099-MISC. This form will help you avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. Payments to independent contractors are referred to as non-employee compensation (NEC). Form 1099-MISC will continue to report rents, royalties, crop insurance proceeds and several other types of income unrelated to independent contractors.
Because so many fraudulent tax returns are filed right after e-filing opens up in January, the IRS requires 1099-MISCs for NEC to be filed by January 31st and will not release refunds for individual income tax returns that include the earned income tax credit until the NEC amounts can be verified. The 2020 Form 1099-NEC deadline is February 1, 2021 due to the weekend. This is also the same due date for mailing the recipient his or her copy of the 1099-NEC.
The government provides IRS Form W-9, Request for Taxpayer Identification Number and Certification, as a means for you to obtain the vendor’s data you’ll need to accurately file the 1099s. It also provides you with verification that you complied with the law, in case the vendor gave you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS.
The penalty for failure to file a required information return due in 2021, such as the 1099-NEC, is $280 per information return. The penalty is reduced to $50 if a correct but late information return is filed no later than the 30th day after the required filing date of February 1st, 2021, and it is reduced to $110 for returns filed after the 30th day but no later than August 1st, 2021. If you are required to file 250 or more information returns, you must file them electronically.
Given the hefty penalties related to noncompliance, we urge you to carefully review your records for required 1099 reporting. If you have any questions about the 1099-MISC filing date, or would like us to prepare these forms on your behalf, 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.
This time of year may have you wondering, how much do charitable donations reduce taxes? And what opportunities are there this year due to tax law changes? The good news is, due to the pandemic, tax rules have been adjusted to enhance the tax benefits of charitable giving. Here’s what you need to know:
The most recent change was incorporated within 2020’s CARES Act, which Congress passed to provide relief to those impacted by the global pandemic. In addition to providing paycheck protection for workers and support for small businesses as they struggled to survive the economic impact of coronavirus, the CARES Act also boosted the limit on cash donations from 60% to 100% in some situations. This increase is only valid for tax year 2020 and is limited to cash contributions given to charities that are not donor-advised funds or supporting organizations. Congress also is allowing a limited (up to $300) 2020 cash charitable contribution deduction for non-itemizers.
If you’re over 70.5 and you like to make charitable contributions directly from an IRA, you are able to donate up to a maximum of $100,000 per year via a Qualified IRA Charitable Contribution (QCD). This contribution will count towards your required minimum distribution, and because the distribution goes directly to the charity, it doesn’t increase your income and it still allows the donor to take advantage of the increased standard deduction.
Speaking of the increased standard deduction, when the 2017 Tax Cuts and Jobs Act (TCJA) boosted the standard deduction to $12,400 (for 2020) for individual taxpayers and twice that for married couples filing jointly, it cut the number of people taking itemized deductions, effectively removing an incentive for charitable giving. With only 13.7% of taxpayers estimated to have itemized their 2019 taxes, we have previously written about the benefit of “bunching”. Effectively, individuals can bunch their donations into a single year, thus allowing them to continue giving to the charities that they believe in while still taking an itemized deduction.
While the TCJA’s boost in standard deduction decreased the percentage of people itemizing, at the same time it boosted the deductibility of cash contributions being made from 50% to 60% of the donor’s adjusted gross income, making it more attractive for individual donors to give cash gifts.
Finally, in late 2019 Congress passed the SECURE ACT, which made a couple of notable changes, including pushing the age at which retirement plan participants need to take required minimum distributions (RMDs) from 70½ to 72, and taking away the ability for account holders to designate non-spousal beneficiaries who could hold onto them over the course of their entire lifetimes, taking distributions at will. Under the SECURE Act, those distributions need to be completed within 10 years’ time, making it a potentially better option to making the beneficiary a lifetime-income charitable vehicle in the form of either a remainder trust or a gift annuity funded with the account proceeds.
By indicating a beneficiary who will receive income over the course of their lifetime, you get the advantage of accomplishing the initial intent of giving to the beneficiary, and then upon the beneficiary’s death, whatever is left in either an IRA or a life insurance policy structured in this way gets distributed to the original benefactor’s designated charity.
Charitable contributions are an important part of our individual legacy. And when structured properly, they can also offer tax advantages. For more information on how you can leverage the new tax laws to benefit causes you care about as well as your own personal finances, 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.
