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A New Resolution for The End of April

Tax season for the year is over – well for those individuals who filed their returns without an extension.  But that does not mean that for tax preparers, they don’t have to think about income tax preparation until the change of the calendar year.  Your preparer may be involved in preparation of business returns which may not have a calendar year as the tax year, so the due date may occur some time other than April.  Estates may have a fiscal year end rather than a calendar year end.  Individual returns placed on extension will now have a due date of October 15.  So, while many people may think that tax season ends in April, for preparers it may be that they are preparing returns all year long – it is just dependent upon the type of return.  April is the end of tax season primarily for individual returns. 

Now that the tax filing deadline has passed, please don’t adopt the attitude that you don’t need to think about your taxes until next year.  Rather, adopt a new resolution to be better organized to make next year’s tax season easier – not only for yourself but also for your preparer.  Here are a couple of suggestions for you to achieve success in that resolution:

  • Be organized. 
  • Consider a method, either electronically or manually, where you have files to accumulate information throughout the year. 
    • Create a file for charitable donations in which to put the acknowledgement of your donations. 
    • Create a file for medical deductions for receipts. 
    • Create a general deduction file for any miscellaneous deductions that may or may not be needed. 
    • Create a file for communications you may receive from taxing authorities. 
  • Should you close a financial account during the year, put a notation with your tax information that the account was closed and the date.  Better yet, put a copy of the last statement in your tax records for the year.  If you close the account early in the year, it is easy to forget having done so a year later. 
  • Spreadsheets are great for keeping information organized.  Perhaps you would rather keep your information on paper rather than electronically, so set up a paper spreadsheet to keep track of expenses.  A great example of how helpful this can be is if you are able to itemize deductions, are you aware that for medical deductions you can take mileage, parking and tolls for visits to medical providers?  If you don’t make a note of it – especially for parking or tolls, you may not think about it next year.  Also, did you put a $20 bill in a boot drive for emergency responders collecting at a red light?  You will most likely forget making that donation next year.  Sorry, but the money given to Girl Scouts for cookies is not deductible because you received the cookies in return!
  • Finally, just make a simple checklist for income sources, deductions to be used at the beginning of the year to note receipt of your tax documents, e.g., financial institutions 1099 forms, mortgage interest 1098 form, real estate taxes paid, etc.  Once you can check off the expected items, you can transmit your information to your preparer and be ahead of the last-minute rush in April.

Crowdfunding and Taxes

Many people are familiar with crowdfunding to raise money for charities, for gifts, to assist victims of tragedy, etc.  Some of the sites are Go Fund Me, Facebook, Kindful and so many others.  It is always nice to see people looking out for others.  But did you know that money raised in this manner may be taxable for income taxes?

Let’s take a look at when the funds raised are not income taxable:

  • If the organizer gives the money to the person for whom the crowdfunding campaign has been organized. 
  • If the people contributing have no expectation of receiving anything in return.

However, if an employer donates to a crowdfunding campaign for the benefit of an employee, those contributions are considered taxable income. 

If you are an organizer of a crowdfunding campaign, you are encouraged to contact a tax professional for information and advice regarding the campaign and what to be aware of.  If the amount raised is more than $600, the crowdfunding website must file Form 1099-K with the IRS.  Also, if any goods and/or services are received by the contributors, this must also be reported to the IRS. 

These are the same rules that apply if someone organizes an event to benefit a charity or an individual, such as a golf event.  If you pay to participate in the event (you play golf, you get a meal, etc.) then the total amount of your participation fee is not considered charitable because you received something in return. 

So, if you are a contributor to a crowdfunding event or an event for charity, be aware of the parameters which will be followed for how your contribution will be classified for purposes of it being considered a charitable deduction or simply a gift.  They are not the same and what you may think is a deduction that can be used for income tax purposes may not be eligible.

If you are an organizer of crowdfunding for a specific cause or for a charitable event, do your homework and know what the requirements are for reporting the monies raised.  Be certain to keep good records of the event so that if you are questioned, you can provide whatever information is necessary.

This is not meant to discourage crowdfunding but to make you aware that there may be more requirements than simply setting up a site to collect donations.

Need To Correct or Amend Your Form 1040?

Taxpayers needing to amend or correct a 1040 Form – including Forms 1040-SS, 1040-NR and others, can now do so electronically.  Until recently, to do so required the filing of the amended or corrected returns on paper.  Changes not only regarding income or deductions, but changes to filing status or to add a dependent not previously claimed by the taxpayer can be made.

Not only does this make the filing of such returns easier for the taxpayers, it also enables the IRS to more quickly process the returns and avoid the backlogs experienced, especially since COVID.  There are approximately 3 million amended returns filed each year.

A new, electronic checkbox has been added for Forms 1040/1040-SR, 1040-NR and 1040-SS/1040-PR to indicate that a superseding return is being filed electronically. A superseded return is one that is filed after the originally filed return but submitted before the due date, including extensions.

Very similar to the “Where’s My Refund” option on irs.gov, there is an option of “Where’s My Amended Return” that can be utilized to check the status of an electronically filed Form 1040-X.

Forms 1040, 1040-NR and 1040-SR can still be amended electronically for tax years 2019, 2020 and 2021 along with corrected Forms 1040-SS and Form 1040-PR for tax year 2021.

Bottom line, file any returns electronically if the option is available.  Visit irs.gov to see if the return you’re filing is available for electronic filing.  Be on the alert for new electronic filing options as the IRS moves forward with expanding digital services.

The End Is Near

That phrase can have so many different meanings, but as a tax preparer for many years, to me it means the end of TAX SEASON is near.  For most tax preparers, at this point, they are weary, overwhelmed, and just wondering how they will get all of the returns completed, or extensions filed.

You may ask why it is so stressful for tax preparers?  Yes, given that this is a once a year task for each of us which brings tax preparers additional work, what other factors create the stress?

First and foremost is the procrastination of taxpayers in providing information to the tax preparer.  There are taxpayers that are diligent in monitoring the receipt of the needed information and, as soon as they have received all tax forms, they have passed it on to their preparer.  But, then there are others. . . . . It is the beginning of April and some taxpayers still haven’t shared the information with their preparer. Yet, the taxpayer thinks the preparer will be able to drop everything to do their return.  I ask, is that being fair to the preparer who has piles, perhaps, of returns to do for people who submitted their information earlier?

So, you may ask, why not file for an extension?  Many have the misunderstanding that filing for an extension means you have an extension of time to file but also for payment of any tax owing.  WRONG.  Filing for an extension is only for purposes of filing.  If there is any tax liability anticipated, a payment should be made before the end of tax season to toll the accruing of penalties and/or interest for underpayment or late payment.  The tax preparer still needs information in order to prepare and file for an extension.  An extension is not a free pass to address the taxes at a later date.  A diligent preparer will want ample notice for the need to file for an extension. 

There are situations where a taxpayer may not receive all of their information needed to timely prepare a return.  This is most common in situations where a taxpayer has an interest in a partnership and receives a Schedule K-1.  This K-1 may not be issued in January or February like most tax information.  So, a taxpayer’s return must go on extension. 

As a tax preparer, I would ask that whomever preparers your tax returns deserves your patience and diligence.  Here are a few quick and simple suggestions to make life a little easier for your preparer:

  • Don’t procrastinate in providing information to your preparer.
  • Be organized and have your information in some order.  If you provide information on paper, take the information out of envelopes and open it up.  Group it together by income, deductions, etc.  If you provide the information electronically, don’t send everything in one file in any order. Organize it.
  • If your preparer has encouraged you to make estimated payments, provide information on payments made.
  • If your mailing address changes, tell your preparer.  Don’t make them wonder why they are seeing two different addresses on your information. 
  • Don’t expect your preparer to “create” charitable deductions for you if you do not have receipts and are able to itemize deductions.  Have proof of your donations.
  • Regardless of the method your preparer uses to obtain your signature – electronic or on paper – give your attention to this as soon as possible so that your preparer can check your return off of their TO DO list. 
  • Finally, remember that your tax preparer is human and doesn’t have a magic wand.  They are preparing your taxes according to the tax laws and are not looking for you to have to pay taxes, so don’t get mad at them if you owe.  Numbers don’t lie.  And, keep in mind that a little sweetness – whether in attitude or sugar – can go a long way with your preparer.

Estate Taxes Across the U.S.

It is human nature to feel that we are overtaxed.  And yes, rates for one tax or another will vary from state to state. 

We have what are commonly referred to as death taxes.  These are usually identified as an inheritance tax or an estate tax and vary by state.  Estate taxes are based on the size of the estate while inheritance taxes are based on the relationship of the decedent to the beneficiary. 

Another death tax is the federal estate tax which is based on the size of the estate.  Currently, the federal estate tax does not come into play unless you have assets in the neighborhood of $12 million.  However, you must keep in mind that, come 2026, that number is expected to drop significantly and more estates are likely to incur a federal estate tax liability.  Federal estate taxes are IN ADDITION to any state death taxes which may be payable. 

Here is a short comparison of estate and gift taxes by state across the nation:

NEW JERSEY – There is no estate tax, however there is an inheritance tax.  The inheritance tax can be up to 15 percent based upon the relationship, but spouses and lineal descendants – children, grandchildren – and charities are exempt from inheritance taxes.  Other beneficiaries are taxed at the rate of 15 percent.

PENNSYLVANIA – There is no estate tax, but there is an inheritance tax for anyone but a spouse or a charity.  Children and grandchildren pay tax of 4.5 percent of their inheritance, siblings to the decedent are taxed at 12 percent and all others are taxed at 15 percent. 

CONNECTICUT – There is an estate tax on par with the federal estate tax.  However, should you be lucky enough to have an estate valued at $129 million or more, there is a cap of $15 million in Connecticut estate taxes.  Further, Connecticut is the only jurisdiction in the U.S. with a gift tax.

IOWA – Here again, there is no estate tax but there is currently an inheritance tax which will be phased out or repealed completely for individuals dying after December 31, 2024. 

NEBRASKA – While there is no estate tax, depending on the relationship and age of the beneficiary, inheritance tax can range up to 15 percent.

WASHINGTON DC – There is an estate tax for estates in excess of $4.3 million.

RHODE ISLAND – No inheritance tax but there is an estate tax that will kick in once an estate reaches $1.648 million.

VERMONT – Interestingly, Vermont has a flat tax rate of 16 percent for estates in excess of $5 million.

WASHINGTON STATE – While there is no inheritance tax, there is a state estate tax for estates over $2.193 million.

NEW YORK – An estate tax is assessed for estates in excess of $6.11 million.  Unsurprisingly, New York has a twist in their estate tax with a built in “cliff.”  For instance, if an estate is between 100% and 105% of the exemption amount, there’s a rapid phase-out of the exemption which estates in excess of 105 percent of the exemption amount will lose the benefit of the exemption amount entirely and be subject to tax from dollar one!  In addition, if the decedent made a taxable gift within three years of death, the taxable gift amount is brought back into the estate for estate tax purposes.

Regardless of where you live, you are subject to taxes.  But, as we know, we all pay taxes in one way or another.  So I leave you with this question – what’s the best state to live in, with regard to taxes?

What Is Federal Estate Tax Portability?

For several years now, we have been hearing about “portability.” Do you know what it means? How does the term affect you?

Simply stated, portability of the federal estate tax exemption between married couples means that if the first spouse dies and the value of the estate does not require the use of all of the deceased spouse’s federal exemption from estate taxes, then the amount of the exemption that was not used for the deceased spouse’s estate may be transferred to the surviving spouse’s exemption so that he or she can use the deceased spouse’s unused exemption plus his or her own exemption in effect when the surviving spouse later dies.

Portability is not available for state estate taxes, but only applicable to federal estate taxes.

While the first deceased spouse’s estate may be less than the amount required to file a federal estate tax return, consideration should always be made to preserve the unused portion of the exempt as one does not have a crystal ball to know the circumstances at the time of the second spouse’s passing. There are any number of scenarios which may be present – perhaps the surviving spouse won the lottery, perhaps there was a legal settlement to which the surviving spouse was entitled – just to name a few.

The surviving spouse does not automatically “inherit” the first spouse’s unused exemption, but instead the personal representative of the first spouse’s estate must timely file IRS Form 706, United States Estate (and Generation Skipping Transfer) Tax Return, in order to make an affirmative election. If the surviving spouse is not the personal representative, the spouse should make certain that the personal representative files a Return (Form 706) to preserve the election.

Currently and most likely through 2025, the federal exemption amounts are relatively high – around $12 million at the time of this writing. But, after 2025, the amount is set to be reduced to an amount yet to be determined. Most tax professionals are guessing that the amount will be somewhere in the $5-6 million range, but there is nothing cast in stone.

So, while you may think that you needn’t pay attention to portability while your spouse is living, it is definitely something to keep in mind if your spouse should pass.

Let’s look at a few very simple examples:

  • Xavier and Cleopatra are husband and wife. Xavier has reportable assets of $3.5 million for federal estate taxes. Cleopatra has assets of $4 million.
  • If Xavier dies with a taxable estate of $3.49 million, the estate is not subject to federal estate tax. Rather than lose the unused portion of the available exemption (in 2023 the full exemption is $12,920,000), $9,430,000 would be available for portability use upon Cleopatra’s passing.

  • Now, let’s look at the scenario at the time Cleopatra dies after 2025. Her estate at the time of her death (which includes the assets inherited from Xavier) is $9 million.
    • If portability of Xavier’s unused exemption was not elected, Cleopatra’s estate tax would be based upon the following:
      • $9 million in assets less the federal exemption $5-6 million (exact amount not available at this time) would leave a taxable federal estate of $3-4 million to be taxed at a rate of what could be 40 percent.
      • That would mean that Cleopatra’s estate could pay around $1.5 million in estate taxes.
    • If portability of Xavier’s unused exemption was elected, Cleopatra’s estate tax would be based upon the following:
      • $9 million in assets less the federal exemption of $5-6 million (here again, exact amount not available at this time) less portability of Xavier’s unused exemption of $9,430,000 would eliminate a federally taxable federal estate.

You make the call. Is portability worth filing a return? Perhaps you need to have a discussion with your team – attorney, accountant, financial advisor – before you are faced with a decision. After all, no one has a crystal ball on taxes!

Year-End To Do List

December is upon us and there are many things to accomplish.  Where do we find the time?  But, in spite of all of your tasks to be accomplished and their importance, I am sorry but I must add to that list things that really have a greater impact than holiday preparations.  Here’s a list of tasks for consideration by year end that will have an impact long after the change of the calendar to a new year:

  • If you are of an age that you must take required minimum distributions from a retirement-type account, have you done so?  Failure to do so could result in up to a 50 percent surcharge on the amount which should have been distributed.
  • If you have had significant medical expenses this year, consider incurring any anticipated medical expenses before year end, i.e., new eyeglasses, hearing aids, prescription refills, payment of any non-covered medical expenses, etc., which may help you to meet the threshold for taking medical deductions as an expense on your income tax returns.
  • Review your income tax withholdings so that you can avoid a penalty for underpayment of taxes.
  • Consider if it would be advantageous to make gifts of assets which may likely appreciate over time.  Gifts of up to $16,000 can be made per person in 2022 without any gift tax impact.
  • Make certain your estate plan is up to date.  If these haven’t been updated recently, there may have been changes in the law which should be considered.
  • Consider whether you should make any additional contributions to your retirement accounts if you are eligible.
  • Are you charitably minded?  Consider bunching contributions.  What you would likely make in 2023, make them in 2022 to possibly enable you to get a bigger deduction for the contributions by being able to itemize deductions.
  • If making charitable contributions, consider the use of appreciable assets with a low basis, i.e., stock you acquired long ago that has risen in value.  Donate the stock as opposed to selling it and donating cash to avoid the capital gains.
  • If you are eligible, consider donating from your IRA to charity using a qualified charitable deduction.  This would count toward your required minimum distribution for the year.
  • While this last suggestion may not seem to be important, have you checked your beneficiary designations for life insurance and retirement monies to ensure that they are accurate?  You may be surprised to see how often these are overlooked and don’t reflect the owner’s intention.

In the meantime, enjoy all of the December festivities. 

Backup Withholding – What Is It?

You may have encountered being asked if you wanted “backup withholding” when doing certain financial transactions.  So, what is it? 

Backup withholding is when, during a financial transaction, there is a withholding of income taxes – federal or state – from the proceeds of the transaction.  These withholdings are credited to the taxpayer’s tax account(s).  When the transaction is reported for tax purposes, this amount is treated the same as an estimated tax payment or withholding from a paycheck. 

The tax law provides that the payer of the proceeds is responsible for knowing who they are paying.  You are required to provide your tax identification number – either a Social Security Number or an Employer Identification Number if a non-individual.  If you provide such information, then backup withholding may become optional.  And, there are some instances where backup withholding is not required. 

If backup withholding is required, the current federal rate is 24 percent.  State rates vary depending upon the state.  Payments subject to backup withholdings include, but are not limited to, interest, dividends, rents, commissions, gambling winnings, taxable grants, royalty payments, and sale of assets. 

If you are receiving the proceeds of a transaction that will incur a significant amount of tax, backup withholding is encouraged because, if you do not have sufficient credits for payments toward your annual tax obligation, you could be subject to underpayment penalties.  These penalties can add up quickly.  In the event there would be an excess amount withheld, then you would get a refund of the overpayment upon filing your income tax return. 

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