Tag: Tax

Last month the U.S. Supreme Court agreed to hear the appeal of the Bittner case where the taxpayer is contesting the IRS’s method for computing the FBAR penalty. Under the Bank Secrecy Act of 1970 (BSA), US taxpayers must report their ownership in foreign financial accounts if the combined value of those accounts exceed $10,000. Taxpayers must annually report this ownership on Form 114 Report of Foreign Bank and Financial Accounts (FBAR). Under federal law, the non-willful failure to report an interest in a foreign account is $10,000.

Overview

Currently, the IRS assesses penalties for each financial account that is omitted from an FBAR. That means, if a taxpayer fails to report 10 foreign financial accounts on a single FBAR filing, the IRS will impose $100,000 of penalties ($10,000 X 10 unreported accounts).

During 2021, the Court of Appeals issued two conflicting decisions regarding the calculation of the penalty. One decision in the Fifth Circuit followed the IRS’s formula (noted above). Another decision in the Ninth Circuit held in favor of the taxpayer where the penalty was computed on a per form basis resulting in a $10,000 maximum penalty – for the omission of 13 foreign accounts. The US Supreme Court has agreed to resolve this inconsistent application of the FBAR penalty under the BSA.

Bittner Decision in the Court of Appeals 5th Circuit

The taxpayer in Bittner is appealing to the Supreme Court because the Court of Appeals for the 5th Circuit upheld the IRS’s computation of the non-willful FBAR penalty. Upon audit, the IRS assessed penalties for years 2007 through 2011 totaling $2.72 million on 272 accounts that were not reported on FBARs. The Court ruled that the non-willful FBAR penalty applied to each unreported foreign account, and not on a per annual FBAR form basis. This decision was issued in November of 2021. If the penalty was applied on a per form basis for each year, the taxpayer would have been subject to $50,000 of penalties as opposed to the $2.72 million calculated by the IRS.

Boyd Decision in the Court of Appeals 9th Circuit

In March of 2021, the Court of Appeals for the 9th Circuit held in favor of the taxpayer and determined that the non-willful FBAR penalty should be calculated on an annual form basis rather than per omitted account. In Boyd, the taxpayer had an ownership interest in 13 financial accounts in the United Kingdom that were subject to FBAR reporting.

By way of background, for the 2010 tax year, the taxpayer failed to report income and file an FBAR related to their foreign financial accounts. In 2012, the taxpayer amended their 2010 tax return, under the IRS’s Voluntary Disclosure Program, to report the income and file the FBAR for the foreign accounts. Upon audit, the IRS imposed the $10,000 FBAR penalty for each of the 13 foreign accounts.

The 9th Circuit disagreed with the IRS’s penalty computation. The Court stated that the BSA does not authorize the IRS to issue a separate penalty for each account that should have been listed on the FBAR. Thus, the Court held that the non-willful omission of multiple accounts from an FBAR to be a single violation subject to a maximum penalty of $10,000.

RVG Observation

Since the decisions in Bittner and Boyd conflict, the Supreme Court’s decision to grant certiorari in Bittner should bring clarity to the application of the non-willful FBAR penalty. This uniform approach is necessary due to the rapid growth of the global economy. The case will be heard by the Court in the fall of 2022.

If you would like to discuss the potential impact that the FBAR rules may have on you, please call RVG & Company at 954.233.1767 to speak with on of our experts in this area.

The Senate Democrats have agreed on a tax bill titled the “Inflation Reduction Act of 2022” (Act) that is anticipated to raise $450 billion in taxes to pay for clean energy and inflation reduction. While the full Senate has not approved this measure, the Act seeks to raise substantially less tax revenue than President Biden’s proposed Build Back Better legislation, that was rejected by the Senate earlier this year because it sought to raise $1.7 trillion of new taxes.

The significant areas where the Act seeks to raise taxes are as follows:

• Corporate Minimum Tax – The Act would impose a minimum tax of 15% on corporations that have more than $1 billion of book income – as determined by the corporation’s financial statement (not its tax return). The tax would not apply to S Corporations and real estate investment trusts.
• Expand the Carried Interest Rule – The Act would increase the holding period from three years to five years for taxpayers with adjusted gross income of $400,000 or more to receive long-term capital gains treatment. Long-term capital gains are taxed at a rate of 20%, while ordinary income is taxed at 37% .

It should be noted that when compared to the Build Back Better legislation, the Act does not increase individual tax rates, capital gains rates, eliminate the tax-free IRC § 1031 real property exchange or limit the tax benefit of IRC §1202 – the gain exclusion for owners of small businesses.

One area of the Act that will impact taxpayers is its allocation of revenue to IRS enforcement and administration. The Act appropriates $80 billion to the IRS over 10 years. The funds will be used by the IRS in the following areas:

• Taxpayer Services: Filing assistance, education, account services and taxpayer advocacy.
• Enforcement: Hiring additional IRS field agents, expansion of exam technology, and increasing the rate of audits and criminal investigations.
• Operations & Administration: This includes the improvement of offices, telecommunications, technical research, security, and information technology development.

While this legislation is not final and may be revised – RVG & Company will keep you informed of any developments.

Small businesses have several options when it comes to providing retirement savings plans for their employees and owners. These plans are generally easy to set up and do not require complex annual filings or costly administration. This article will review the choices available to small business owners and self-employed individuals.

By starting a retirement savings plan businesses help their employees and owners save for their future. Retirement plans enable employers to attract and retain qualified employees. Also, the plans offer tax savings to the business. The common tax advantages are that the employer contributions are deductible from the employer’s income and employee contributions are not taxed until they are distributed to the employee. In addition, the money in the plan grows tax-free and qualifying employers may receive credit for certain startup costs.

This summary will focus on defined contribution plans and Individual Retirement Accounts (IRAs) where the employer and/or employee make the contributions.

Retirement Plan Options That Small Businesses May Consider

SIMPLE IRA (Savings Incentive Match Plan for Employees):

This is available to any business that has 100 or fewer employees. Under a SIMPLE IRA, employees can contribute $14,000 in 2022 and $17,000 if age 50 or older. Employers are required to either match the employees’ contribution dollar for dollar – up to 3 percent of an employee’s compensation – or make a fixed contribution of 2% of compensation for all eligible employees, even if the employees choose not to contribute. Employee contributions to the SIMPLE IRA are excluded from the employee’s taxable income but are subject to Social Security, Medicare (FICA), and Federal Unemployment Tax Act (FUTA) withholding taxes. Employer contributions are deductible from the business’s taxable income. Lastly, the employee vests into all contributions immediately.

SIMPLE 401K:

Like the SIMPLE IRA, this plan is available to businesses that have 100 or fewer employees, and each receives at least $5,000 in compensation. Under the SIMPLE 401K, an employee may elect to defer a portion of their compensation. But unlike a regular 401K, the employer must make either: (i) a matching contribution of up to 3% of each employee’s pay, or (ii) a contribution of 2% of each eligible employee’s pay. For 2022, an employee can contribute up to $14,000 (an employee over age 50 can contribute up to $3,000 more). Employee contributions are excluded from taxable income but are subject to FICA and FUTA withholding. Employer contributions are deductible from the business’s taxable income. Lastly, employees are immediately 100% vested in all contributions. While this plan requires the annual filing of Form 5500, it is not subject to the complex non-discrimination rules of regular 401Ks, which may limit the participation of highly compensated employees.

SEP (Simplified Employee Pension):

A SEP plan allows employers to create SEP IRAs for themselves and each of their employees. Self-employed individuals can also establish a SEP. Employers must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. Employer contributions are limited to the lesser of 25% of pay or $61,000 for 2022. Catch-up contributions for employees that are age 50 or older are not permitted. SEPs have low start-up and operating costs and can be set up with Form 5305-SEP. The amounts contributed to a SEP can vary each year – offering flexibility when business conditions change. Employees immediately vest into the SEP. Employers often start a SEP plan so that they can contribute to their retirement at higher levels than a traditional IRA permits. Employers receive a tax deduction for contributions made to a SEP and these amounts are not included as employee wages for income tax withholding but are subject to FICA and FUTA.

Payroll Deduction IRAs:

Under this IRA, employees establish a Traditional or Roth IRA with a financial institution and authorize a payroll deduction amount for it. Any size business and self-employed individual can establish a Payroll Deduction IRA plan. The employer does not make any contributions, they merely arrange for the employees to make a payroll deduction and transmit the contributions to a financial institution. There a no filing requirements. The benefit for the employee is that they make IRA contributions throughout the year as opposed to the end of the year when they may not have funds.

Solo / One Participant 401Ks:

This plan is a traditional 401(K) that covers a business owner with no employees, or the business owner and their spouse. If the business owner is both an employee and employer, they can make an elective deferral for 2022 of up to $20,500; plus 25% of their compensation. However, the total contribution for 2022 cannot exceed $61,000. For self-employed individuals, there is a special computation for contribution limits that are based on earned income. The benefit of a Solo 401(K) is that it permits a greater amount to be saved towards retirement than traditional IRAs, SEPs, and SIMPLE plans. While this plan may have higher administrative costs, the employer does not have to perform nondiscrimination testing for highly compensated employees and can file Form 5500 EZ as opposed to the complex Form 5500.

Conclusion:

While each of these retirement plans requires planning and a form to be filed, employer-sponsored IRA, SEP, and SIMPLE plans are the easiest plans to create and maintain. They offer benefits like qualified plans, such as Regular 401Ks, pensions, and profit-sharing plans, but without complex annual filings and significant administrative costs.

If you would like to discuss the potential retirement plan opportunities available to your business, please call RVG & Company at 954.233.1767, and we can help you evaluate the appropriate solution.

On August 16, 2022, President Biden signed the Inflation Reduction Act (“Act”) into law. The legislation contains significant changes related to tax, climate change, energy, and health care. The new law is expected to raise approximately $222 billion over $10 years. As an overview, the Act includes a 15% corporate alternative minimum tax (AMT), a 1% excise tax on stock buybacks, a two-year extension of the excess business loss limitation rules, and additional funding for the IRS. The Act also contains several energy-tax incentive provisions.

It should be noted that the Act does not increase individual tax rates, capital gains rates, change the estate and gift tax rules, eliminate the tax-free IRC § 1031 real property exchange, or limit the tax benefit of IRC §1202 – the gain exclusion for owners of small businesses.

Summary of Tax the Provisions

15% AMT:

The Act imposes a 15% corporate AMT on large corporations that have an average of $1 billion of income based on their financial statements for a three-year period. The AMT is effective for tax years beginning after December 31, 2022.

Excise Tax on Corporate Stock Buybacks:

The Act levies a 1% tax on stock repurchases by publicly traded corporations. The tax applies to repurchases of stock after December 31, 2022. The tax is imposed on the fair market value of the stock repurchased by the corporation during the tax year, reduced by the value of stock issued by the corporation during the tax year.

Extension of Excess Business Loss Limitation Rules (EBLL):

Under this provision, the deduction of business losses of a non-corporate taxpayer is limited. The Act extends this limitation until December 31, 2028. Before the Act, the limitation was set to expire at the end of 2026. Under the EBLL, taxpayers may not deduct an excess business loss against other nonbusiness income (generally, net business deductions over business income) if the loss exceeds $250,000 ($500,000 in the case of a joint return). The excess loss becomes a net operating loss in subsequent years and is available to offset 80% of taxable income each year.

Enhancement of IRS Resources:

The Act will allocate $80 billion to IRS enforcement and administration over 10 years. The resources will be focused on: (i) Taxpayer Services – such as filing assistance, account services, and taxpayer advocacy; (ii) Enforcement – hiring additional IRS field agents, expansion of exam technology, and increasing the rate of audits and criminal investigations; and (iii) Operations & Administration – this includes the improvement of offices, telecommunications, technical research, security, and information technology development.

Energy & Climate Tax Credits:

The Act provides not only new energy tax incentives, but also provides new means to deliver them. In some instances, the Act allows direct payments from the federal government to taxpayers in lieu of tax credits. In other instances, the tax credits can be transferred, or sold, to other taxpayers. Some of the notable credits are:

• The Production Tax Credit – This is for renewable electricity production.
• Investment Tax Credit – This is for the installation of renewable energy property.
• Carbon Oxide Credit – The Act expanded the credit for capturing each metric ton of qualified carbon oxide using special equipment.
• Other Fuel Credits – The Act also provides for the broadening of credits for biodiesel and sustainable aviation fuel along with a new credit for clean hydrogen production.

RVG & Company

If you would like to discuss the potential impact that the Act may have on you, or possible tax strategies please contact your Trusted Advisor at RVG & Company at 954.233.1767.

If your business loses money during the current year those losses may provide some tax relief. The losses can be used to save income taxes in future years. The losses are considered net operating losses (NOLs). NOLs occur when business deductions exceed business income. The tax law allows individuals and C corporations to carry these losses forward indefinitely to reduce taxable income. During the past few years there have been significant changes to the NOL rules.

Overview

If your business is operated as a partnership, LLC, or S corporation, your share of the business’s losses is passed through the business to your individual return and deducted from your other personal income. However, if you operate your business through a C corporation, you cannot deduct the entity’s loss on your personal return. It belongs to the corporation.

The Tax Cuts and Jobs Act of 2017 (TCJA) revised the NOL rules. It imposed an 80% limitation on NOLs and removed the ability to carry back the NOL to a prior tax year to obtain a refund. However, under the new law, NOLs can be carried forward indefinitely. Also, The TCJA placed an additional limitation on losses for individuals, known as the excess business loss limitation (EBL). Both the NOL and EBL applied to tax years beginning January 1, 2018. However, the CARES Act suspended the application of the NOL and EBL limitations until 2021.

This article will review the NOL and EBL TCJA changes that have been restored for tax years 2021 and beyond.

Net Operating Losses – Background to Recent Changes in NOL Rules

Under the TCJA, NOLs can be carried forward for an indefinite period. But the NOL utilized cannot exceed 80% of taxable income. Prior to the TCJA, an NOL could completely offset taxable income and could be carried back up to two years and forward for 20 years.

In response to the COVID-19 pandemic, the CARES Act of 2020 suspended the TCJA’s NOL rules for losses arising in tax years 2018 – 2020. The CARES Act allowed NOLs to be carried back for five years and carried forward indefinitely. In addition, the 80% limitation was deferred along with the EBL limitation rule.

Example of Current NOL Rule for 2021 and Beyond

For NOLs used in the tax year 2021 and after, the TCJA rules will apply. As a result, an NOL carried into 2021 can only offset 80% of taxable income – even though it can be carried forward indefinitely. Here’s an example of the rule. In 2021, taxpayer Y had NOL carryforwards from 2018, 2019, and 2020 totaling $1,500,000. Also, in 2021, Y has a taxable income of $1,000,000. Y can use $800,000 of the NOL to offset the 2021 taxable income ($1,000,000 x 80%). Therefore, Y’s final taxable income is $200,000 ($1,000,000 – $800,000). Taxpayer Y’s NOL carryforward is $700,000 ($1,500,000 – $800,000).

Prior to the TCJA, Y’s taxable income would have been completely offset by the NOL carryforward ($1,500,000 [NOL] – $1,000,000 [taxable income].

Who can Utilize an NOL

Generally, individuals or C corporations can carry forward NOLs indefinitely to reduce taxable income in future years. However, pass-through entities such as partnerships, limited liability companies, and S corporations cannot claim NOLs. Instead, the partners, members of limited liability companies, and shareholders of S corporations can claim NOLs proportionate to their ownership interest in the business entity on their personal tax returns.

Excess Business Loss Limitation

Prior to the TCJA, when an individual incurred a loss from a business, they could reduce their nonbusiness income (such as W-2 wages, interest, dividends, and capital gains) by the amount of that business loss without any limitations. This assumes that the individual had sufficient tax basis, met the “at-risk” requirements, and the passive activity loss (PAL) rules. The discussion of basis, “at-risk” and PAL rules are beyond the scope of this article.

The new EBL limitation is intended to restrict the ability of taxpayers to use business losses to offset other sources of income. The provision is effective for taxable years beginning after December 31, 2017, and before January 1, 2029. However, similar to the NOL provisions, the CARES Act suspended the EBL until tax years beginning after 2021.

The EBL limitation applies to noncorporate taxpayers, such as individuals, trusts, and estates, and does not allow a “business” loss to exceed $270,000 for single filers or $540,000 for married joint filers for the tax year 2022, indexed annually.

Example of EBL Limitation

Taxpayer B has a loss of $1 million in 2022 allocated from an S corporation. The S corporation loss is not subject to the basis, at-risk, or PAL limitation. Also, in 2022, B has W-2 wages of $750,000 and capital gains of $250,000 from stock sales.

At first, it appears that B’s taxable income would be $0, after deducting the $1 million S corporation loss. However, B’s taxable income is $730,000. The business loss of $1 million is not fully deductible due to the EBL limitation. For the tax year 2022, a single taxpayer may only deduct $270,000 of the $1 million S corporation loss. The $270,000 limitation will offset the taxpayer’s other income, and therefore the taxpayer will be subject to tax on $730,000 of W-2 and capital gain income. The remaining business loss that is not deductible in 2022 will be carried forward to 2023 as an NOL (and subject to the NOL limitations described above). The amount carried forward is deductible against any source of income during 2023 including wages, interest, dividends, and capital gains.

RVG and Company

The NOL and EBL limitations that restarted in 2021 are complex and potentially interconnected for taxpayers that have income from flow-through entities and other sources. Taxpayers will need to accurately determine their potential losses for each loss category to determine their taxable income and carry forward losses for future tax years.

DISCLAIMER: The information covered in this article is not intended to provide and should not be relied on for tax, accounting, or legal advice; instead, all information, content, and materials informed are for informational purposes only. Consult your tax, legal, or accounting advisor before taking action. If you require advisory services, please contact our office.

If you would like to discuss the impact of the NOL and the EBL limitations, please call RVG & Company at 954.233.1767.

Simply put, the 1031 exchange is an exchange of one real estate investment property for another that allows capital gains taxes to be deferred. By exchanging your appreciated investment or rental property rather than selling it, you may avoid immediate tax on the potential gain.

Learn how Savvy Investors Use Like-Kind Exchange to Defer Capital Gains Taxes.

You can defer tax on the gain through a “like-kind” exchange. Internal Revenue Code § 1031 provides the rules for this. IRC Section 1031 has many moving parts that real estate investors must understand before attempting its use: A taxpayer may sell an investment or business property (relinquished property) and defer tax on the gain if the taxpayer reinvests in a similar property (replacement property). Nonrecognition treatment doesn’t apply to personal property and real property held primarily for sale.

The reason for the nonrecognition treatment is that the taxpayer continues to be invested in the same kind of property and has not cashed out of a real estate investment or business. Therefore, taxes are deferred until the taxpayer does cash out and sells the property outright.

This article will provide an overview of the rules related to a like-kind exchange. It should be noted that in 2021, the Biden Administration sought to revise the benefits of the tax deferral, but those changes were not approved under the Build Back Better legislation. Also, the Inflation Reduction Act of 2022 which was recently passed in August did not alter the rules either. However, taxpayers need to be apprised of this and monitor this potential issue.

Basic Requirements of a Like-Kind Exchange

IRC § 1031 is very form-driven, and taxpayers must satisfy several requirements, or the deferral fails. One important requirement is that the transaction must be structured as an exchange. This means that taxpayers cannot sell, obtain the proceeds, and then buy a replacement property. Rather, they must either trade the property directly or use the deferred exchange rules described below.

Timeline

In a deferred exchange, a taxpayer must identify the replacement property within 45 days (the identification period) and receive it within 180 days (the exchange period). While the tax law allows deferred exchanges, it requires time limits for them to occur.

Basis

Taxpayers take the same “basis” in the replacement property that they had in the relinquished property. Like-kind exchanges are reported on Form 8824 – and this form tracks the basis of the relinquished and replacement properties.

When a property is exchanged solely for another property of a like-kind, computing the basis in the replacement property is straightforward. In that case, the taxpayer’s basis in the replacement property is the taxpayer’s adjusted basis in the relinquished property.

However, the computation of basis is more complicated when the exchanged properties are not equal in value, so money or other property (boot) is transferred or received. If “boot” is involved, the gain is recognized, but only up to the amount of boot received in the exchange.

Also, if the property that is exchanged is subject to debt from which the taxpayer is being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s the equivalent of providing cash.

Deferred Exchanges

As noted above, for like-kind exchange treatment to apply, there must be an exchange of real properties that are of like-kind and have been held for productive use in a trade or business or for investment. The transaction must be an exchange – not a transfer of property for money that is then used to acquire the replacement property. A sale of property followed by a purchase of another property (that is of a like-kind to the property sold) doesn’t qualify for nonrecognition of gain or loss under IRC § 1031.

Often the properties cannot be exchanged immediately or simultaneously. For this reason, the law permits deferred exchanges. A “deferred exchange” occurs when a taxpayer, under an agreement, transfers the property and later receives like-kind property. To qualify as a deferred exchange, the taxpayer must identify the replacement property before the end of the “identification period,” and receive the replacement property before the end of the “exchange period, as described above. Taxpayers can accomplish a deferred exchange using safe harbor transactions such as a qualified intermediary or guarantee arrangement. Moreover, the transactions become more complex when they involve related parties or Delaware Statutory Trusts.

RVG and Company

While the fundamental principles of the like-kind exchange appear straight-forward, complexities can arise with the calculation of basis and depreciation along with the use of deferred exchanges and the application of the safe harbor rules.

If you would like to discuss the benefits, rules and strategies related to like-kind exchanges, please contact RVG & Company today! (954) 233 1767 | [email protected]

DISCLAIMER: The information covered in this article is not intended to provide and should not be relied on for tax, accounting, or legal advice; instead, all information, content, and materials informed are for informational purposes only. Consult your tax, legal, or accounting advisor before taking action. If you require advisory services, please contact our office.

As we approach Q4, now is the perfect opportunity to review your current situation and implement tax-saving strategies to reduce taxes for the coming year. These steps must be taken before the end of the year to reflected in your tax return due in April. This article will outline several steps that can be taken to minimize 2022 taxes and for taxpayers to establish a fiscal and financial plan for their future.

Simple Strategies that can Provide a Significant Benefit for 2022 and Future Years

Maximize Retirement Benefits

In 2022, contributions to 401K and 403(b) plans can reduce taxable income up to $20,500 (individuals that are 50 or older can add $6,500 to the basic workplace retirement plan contribution). For example, an employee earning $100,000 in 2022 who contributes $19,500 to a 401K, reduces their taxable income to only $79,500. Even small business owners can set up retirement plans such as a SIMPLE IRA, SIMPLE 401K, SEP, and a Solo / One Participant 401K that provide tax savings to the business owners and the employees – while providing a retirement program for the future.

Individuals that do not have a retirement plan at work may obtain tax savings by contributing up to $6,000 ($7,000 for those 50 and older) to a deductible IRA.

Use a Health Savings Account (HSA)

Employees with a high-deductible health insurance plan can use an HSA to reduce taxes. As with a 401K, HSA contributions (which may be matched by the employer) by payroll deduction are excluded from the employee’s taxable income. For 2022, the maximum contribution is $3,650 for individuals and $7,300 for families. These funds can grow without the requirement to pay tax on the earnings. An extra tax benefit of an HSA is that when it is used to pay for qualified medical expenses, withdrawals are not taxed.

Minimizing Capital Gains Taxes

Mutual Fund Distributions – If you are considering the purchase of a mutual fund at the end of the year, delay buying it until after the dividend record date to avoid being taxed on capital gain distributions. Towards the end of the fourth quarter, mutual funds generally declare capital gain distributions. These gains are subject to tax even if reinvested and even if the shares value is less than your purchase price. An alternative to a mutual fund is a passively managed exchange-traded fund, which typically has less capital gain distributions.

Charitable Donations of Appreciated Stock – Consider donating publicly traded stock. Qualified appreciated stock is normally publicly traded stock and is eligible to be deducted at its fair market value. Charitable gifts of real property and closely held stock can only qualify for a donation up to their basis. The publicly traded stock must be held for more than one year. By doing this, taxpayers obtain a double benefit of receiving a deduction equal to the full fair market value of the stock and they avoid paying the capital gains tax on the appreciation. It should be noted that the contribution of long-term appreciated property / qualified appreciated stock is generally limited to 30% of adjusted gross income. Thus, the contribution should be timed so it is made when your income is higher.

Unrealized Gains and Losses – Offset the tax impact of any realized gains taken this year by harvesting losses in your portfolio or, in some cases, realizing gains to offset losses (for example, to reduce concentrated stock positions). Any harvested tax losses not offset by gains in 2022 can be carried forward to future tax years throughout an investor’s lifetime. Taxpayers that harvest losses must avoid the wash-sale rule that will disallow losses. This rule provides, that if a taxpayer sells a security at a loss and buys the same security within 30 days of the sale – that loss will be disallowed.

Review Withholding and Estimated Tax Payments

Underpaid withholding taxes and estimated taxes may be subject to penalties. If you are potentially subject to these penalties, consider increasing withholding taxes from wages and bonuses in the fourth quarter. Amounts withheld in the fourth quarter are deemed to be paid equally over each quarter, which can minimize or eliminate a penalty that may be related to the three prior quarters. Taxpayers that have tax withheld from their wages may generate additional income from investment income or real estate holdings that require additional tax through withholding or estimated payments. To avoid a penalty either 90% of the tax shown on your current return or 110% of the tax on your prior year’s tax return must be paid, certain limitations do apply.

Wills and Trusts

While significant estate and gift planning techniques are beyond the scope of this article, taxpayers should be reminded to review wills and trusts to ensure that they reflect any changes in their personal or financial situation that occurred during 2022 or are likely to occur in 2023. It should be noted that in the Tax Cut and Jobs Act of 2017, the estate, generation-skipping transfer, and gift exclusion amount increased from $5 million to $10 million. Also, the TCJA retained the “step-up” based on fair market value for appreciated assets that are transferred by a decedent. While revisions to this rule have been proposed – it is still available.

RVG &Company

While the fundamental principles of the like-kind exchange appear straightforward, complexities can arise with the calculation of basis and depreciation along with the use of deferred exchanges and the application of the safe harbor rules.

If you would like to discuss the benefits, rules and strategies related to like-kind exchanges, please contact RVG & Company today! (954) 233 1767 | [email protected]

DISCLAIMER: The information covered in this article is not intended to provide and should not be relied on for tax, accounting, or legal advice; instead, all information, content, and materials informed are for informational purposes only. Consult your tax, legal, or accounting advisor before taking action. If you require advisory services, please contact our office.

If you inherited an IRA, 401K, or another type of retirement plan account after 2019, you may need to make annual account distributions and pay taxes. A new law also requires the entire balance of the plan to be distributed to you within 10 years. These distributions are known as Required Mandatory Distributions (RMDs). There are some exceptions to the 10-year rule, such as if the beneficiary is a surviving spouse, a minor child, or a person with a disability or chronic illness. This article will focus on changes to the RMD rules under the SECURE Act that went into effect on January 1, 2020 (also known as the Setting Every Community Up for Retirement Enhancement Act of 2019).

Background

Before the SECURE Act, the owner of an IRA was required to take RMDs beginning in the year they reached the age of 70 ½. The SECURE Act relaxed that rule and allowed owners to delay taking the RMD until age 72.

Also, before the SECURE Act, if a non-spouse inherited a retirement account the proceeds could have been distributed over the lifetime of the beneficiary. This was referred to as “stretching an IRA”. Under this concept, the beneficiary could reduce their tax burden on the inherited account, if they delayed the RMD until they retired – when presumably they have less income. This strategy was helpful if the account was inherited before retirement and RMDs were delayed until later years.

As noted above, the SECURE Act now requires beneficiaries that inherited a retirement account on or after January 1, 2020, to withdraw all the assets from the plan within 10 years of the death of the original account holder. However, the withdrawal rule is different when the original owner was receiving RMDs before their death.

IRS Proposed Regulations for Inherited Retirement Accounts

On October 7, 2022, the IRS issued a Notice that said it would delay the enforcement of a regulation issued in February that is related to beneficiaries taking required withdrawals from inherited retirement accounts. The IRS issued the Notice because many taxpayers and tax professionals found the February regulation to be confusing and it contradicted prior guidance by the IRS. The penalty relief applies to taxpayers that inherited retirement accounts in 2020 or 2021.

When the SECURE Act put the 10-year rule in place, taxpayers and tax professionals reasonably interpreted the new law to mean that beneficiaries of inherited retirement accounts could wait until the 10th year after the original owner’s death to withdraw all the assets. In other words, the beneficiary did not have to take an annual RMD every year for 10 years – they could do a lump sum distribution in year 10. In this regard, taxpayers relied upon guidance issued by the IRS in Publication 590B, published in May of 2021 that provided the basis for this application of the 10-year rule.

In February of 2022, the IRS issued a regulation that would require the heirs to take RMDs in cases where the original owner of the retirement account had taken their RMDs before death. This regulation conflicted with IRS guidance in Publication 590B. Consequently, many taxpayers did not take RMDs in 2020 or 2021 concerning IRAs and other retirement accounts that were inherited in 2020. The failure to take an RMD results in a 50% additional tax on the RMD amount that should have been taken. This additional excise tax is often referred to as a penalty.

During the 90-day comment period for the February regulation, the IRS received several comments from taxpayers and tax professionals claiming that they were not certain if they should take an annual RMD concerning retirement accounts that were inherited in 2020 and 2021. In response to the comments the IRS issued the Notice on October 7, 2022, that states that the February regulation would not apply until 2023. Therefore, the 50% tax/penalty would not apply to beneficiaries of IRAs that failed to take an RMD for retirement accounts where the original owner took RMDs before their death. However, in 2023, these beneficiaries must take the RMD or face the 50% additional tax. The IRS Notice also provides that if a beneficiary paid the 50% excise tax/penalty for a 2020 or 2021 RMD, they may request a refund.

RVG & Company

If you have inherited a retirement account after 2019 and would like to discuss the RMD and tax filing requirements to avoid a 50% penalty, please call RVG & Company at (954) 233-1767.