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:

• Social security number or ITIN
• Your filing status
• Your exact refund amount

Generally, the IRS will pay interest on the refund due to you starting from the later of the following:

• The date the return was filed.
• The date the return is received by IRS if it was filed after the due date.
• The date the IRS received the return in a format they can process.      

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.

Mutual funds offer an efficient means of combining investment diversification with professional management. Their income tax effects can be complex, however, and poorly timed purchases or sales can create unpleasant year-end surprises.

Mutual fund investors (excluding qualifying retirement plans) are taxed based on activities within each fund. If a fund investment generates taxable income or the fund sells one of its investments, the income or gain must be passed through to the shareholders. The taxable event occurs on the date the proceeds are distributed to the shareholders, who then owe tax on their individual allocations.

If you buy mutual fund shares toward the end of the year, your cost may include the value of undistributed earnings that have previously accrued within the fund. If the fund then distributes those earnings at year-end, you’ll pay tax on your share even though you paid for the built-up earnings when you bought the shares and thus realized no profit. Additionally, if the fund sold investments during the year at a profit, you’ll be taxed on your share of its year-end distribution of the gain, even if you didn’t own the fund at the time the investments were sold.

Therefore, if you’re considering buying a mutual fund late in the year, ask if it’s going to make a large year-end distribution, and if so, buy after the distribution is completed. Conversely, if you’re selling appreciated shares that you’ve held for over a year, do so before a scheduled distribution, to ensure that your entire profit will be treated as long-term capital gain.

Most mutual fund earnings are taxable (unless earned within a retirement account) even if you automatically reinvest them. Funds must report their annual distributions on Forms 1099, which also indicate the nature of the distributions (interest, capital gains, etc.) so you can determine the proper tax treatment.

Outside the funds, shareholders generate capital gains or losses whenever they sell their shares. The gains or losses are computed by subtracting selling expenses and the “basis” of the shares (generally purchase costs) from the selling price. Determining the basis requires keeping records of each purchase of fund shares, including purchases made by reinvestments of fund earnings. Although mutual funds are now required to track and report shareholders’ cost basis, that requirement only applies to funds acquired after 2011.

When mutual funds are held within IRAs, 401(k) plans, and other qualified retirement plans, their earnings are tax-deferred. However, distributions from such plans are taxed as ordinary income, regardless of how the original earnings would have been taxed if the mutual funds had been held outside the plan. (Roth IRAs are an exception to this treatment.)

If you’re considering buying or selling mutual funds and would like to learn more about them, give us a call.

*This newsletter is issued quarterly to provide you with an informative summary of current business, financial, and tax planning news and opportunities. Do not apply this general information to your specific situation without additional details and/or professional assistance.

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

A like-kind exchange simply involves swapping assets that are similar in nature. For example, you can trade an old business vehicle for a new one, or you can swap land for a strip mall. However, you can’t swap your vehicle for an apartment building because the properties are not similar. Certain types of assets don’t qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.

Typically, an equal swap is rare; some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.

It is not necessary for the exchange of properties to be simultaneous. However, in the case of such a “deferred” exchange, the replacement property must be specifically identified in writing within 45 days and must be received within 180 days (or by your tax return due date, if earlier), after transfer of the exchange property.

With a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn’t a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

When done properly, exchanges let you trade up in value without owing tax on a sale. There’s no limit on the number of times you can exchange property. If you would like to learn more about tax-deferred exchanges, contact us.

 

*This newsletter is issued quarterly to provide you with an informative summary of current business, financial, and tax planning news and opportunities. Do not apply this general information to your specific situation without additional details and/or professional assistance.