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You make the callBy: NATP Research
June 24, 2021

Question: Mariana and Luis regularly contribute $600 cash annually to their favorite charity and ask you if they may take the above-the-line deduction for the $600 on their 2020 tax return for which they file MFJ. What do you tell them?

Answer: No, they may not claim all $600. For 2020, Mariana and Luis are allowed to deduct up to $300 of cash qualified charitable contributions as a deduction before AGI if they claimed the standard deduction [§62(a)(22)]. For 2020, whether filing as single or MFJ, the amount is still only $300, not $600. For 2021, a similar provision would allow a deduction of up to $600 for MFJ filers as a deduction from AGI [§§ 170(p) and 63(b)(4)]. To verify their favorite charity is a qualified organization to receive deductible contributions, use the IRS Tax Exempt Organization Search tool. The Coronavirus Aid, Relief, and Economic Security Act changed the law for 2020 charitable contributions, and for 2021 the Consolidated Appropriations Act, 2021 changed the law.

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Free post-tax season webinars for all tax pros By: National Association of Tax Professionals
June 14, 2021

Taxpayers, and by association their tax professionals, may face two major issues this post-tax season: IRS refund adjustments and estimated tax payments for the 2022 tax season.

The IRS is currently recalculating taxes on unemployment benefits for 2020 based on recent tax law passed during the 2021 tax season. The IRS began issuing refunds the week of May 14 to eligible taxpayers who paid taxes on 2020 unemployment compensation that was later excluded from taxable income due to the American Rescue Plan. Tax pros should confirm these recalculations were done correctly for their clients. In some instances, if a client did not originally claim the earned income credit or other credits, but is now eligible, an amended return will need to be filed.

The IRS will send taxpayers a notice explaining the corrections, which they should expect within 30 days of when the correction is made. Taxpayers should keep any notices they receive for their records. Taxpayers should review their return after receiving their IRS notice(s).

Corrections to any earned income credit (EIC) without qualifying children and the recovery rebate credit are being made automatically as part of this process. However, some taxpayers may be eligible for certain income-based tax credits not claimed on their original return, such as the EIC for their qualifying children. If so, they should file an amended tax return if the revised adjusted gross income amount makes them eligible for additional benefits.

Additionally, making estimated tax payments throughout the year prior to filing their return can help taxpayers reduce that end-of-season sticker shock some face when they realize they owe a significant amount of money (and avoid penalties and interest). Many taxpayers may be required to make estimated tax payments if their income is drastically different from prior years.

To help tax professionals with this post-tax season information, the National Association of Tax Professionals (NATP) is offering two completely free webinars that will detail these topics and help tax professionals determine what they can and should be doing now to help their clients.

Filing Form 1040-X After IRS Calculations — As the IRS recalculates taxes on unemployment benefits, it’s important for you to confirm that it was done correctly. For example, if your client did not originally claim the earned income credit or other credits, but is now eligible, you’ll need to file an amended return.

Calculating Estimated Tax Payments — With the economy opening back up, your client’s income may look drastically different from last year. There are tools available to you to help calculate estimated tax payments and minimize penalty abatement for your clients. We also discuss the new proposed legislation, Tax Deadline Simplification Act.

To learn more and register, visit natptax.com/help.

These webinars are available to anyone interested, not just NATP members.

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You make the callBy: NATP Research
June 3, 2021

Question: Cesar is a plumber, with a Schedule C business. On May 6, 2020, his son, Cesar Jr., who is 10 years old was diagnosed with coronavirus by a test approved by the Centers for Disease Control and Prevention. Cesar was told by his doctor to quarantine since he was exposed and to care for his child until further notice. Cesar was unable to work for 60 days since he was taking care of his child. Cesar’s tax preparer is reading about Form 7202 and is wondering, does Cesar qualify for the sick leave credit for certain self-employed individuals?

Answer: Yes. Cesar can claim the refundable credit for the applicable days on his 2020 tax return. He can do so by filing Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, which is attached to his Form 1040.

The credit is limited to the lesser of 100% of average daily self-employment income or $511 per day ($5,110 in total) if the self-employed individual is:

  1. Subject to a federal, state, or local quarantine or isolation order related to COVID-19
  2. Advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
  3. Experiencing symptoms of COVID-19 and seeking a medical diagnosis

The qualified sick leave equivalent amount is limited to 67% of average daily self-employment income or $200 per day ($2,000 in total) if the self-employed individual is:

  1. Caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or who has been advised by a health care provider to self-quarantine due to concerns related to COVID-19
  2. Caring for a child whose school or place of care is closed, or childcare provider is unavailable due to COVID-19 precautions; or
  3. Experiencing a substantially similar condition specified by the government
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Summary of the American Families Plan and other recent proposalsBy: National Association of Tax Professionals
May 25, 2021

On April 28, 2021, President Biden announced the American Families Plan (AFP). The AFP was released “as an investment in our kids, our families, and our economic future.”

The plan includes $1.8 trillion in investments and tax credits for American families and children over 10 years. It also includes about $1 trillion in investments and $800 billion in tax cuts for American families and workers. Alongside the American Families Plan, the president will propose a set of measures to ensure, according to the plan, “that the wealthiest Americans pay their share in taxes,” while ensuring that no one making $400,000 per year or less will see their taxes go up.

The AFP gives our individual clients access to community college, preschool, affordable child care and paid leave. Proposals within the AFP also impact our business clients, specifically in the area of like-kind exchanges and estate planning.

As of this writing, the AFP is currently a proposal and not federal tax law. This blog will highlight the proposed tax provisions of the AFP. There are additional non-tax-related proposals presented in the AFP that can be read in the White House’s fact sheet.

Extension of tax cuts

The AFP proposes extending the key tax cuts in the American Rescue Plan (ARP):

  • Child tax credit (CTC)
    • CTC enhancement will be extended through 2025
      • CTC will be expanded from $2,000 per child to $3,000 per child for children age six years and older, and $3,600 per child for children under age six
    • AFP will make the CTC permanently fully refundable
    • AFP will deliver regular payments of the credit
  • Earned income credit (EIC)
    • EIC will be permanently expanded to include childless workers
  • Child and dependent care tax credit (CDCTC)
    • CDCTC will be made permanent
    • Families will receive a tax credit for as much as half of their spending on qualified childcare for children under age 13, up to a total of $4,000 for one child or $8,000 for two or more children
    • A 50% reimbursement will be available to families making less than $125,000 a year, while families making between $125,000 and $400,000 will receive a partial credit
    • The credit can be used for expenses ranging from full-time care to after school care and summer care
  • Expanded health insurance tax credits
    • Makes permanent premium reductions for taxpayers who purchase health insurance coverage on their own

As a side note, the IRS, on May 10, 2021, released guidance (IR 2021-105) on the taxability of dependent care assistance programs for 2021 and 2022. Due to the pandemic, many people were unable to use the money they had set aside in their 2020 and 2021 dependent assistance programs.

Notice 2021-26 clarifies for taxpayers that if these dependent care benefits would have been excluded from income if used during taxable year 2020 (or 2021, if applicable), these benefits will remain excludible from gross income and are not considered wages of the employee for 2021 and 2022.

Ordinary rates

  • Restores the top tax federal bracket to 39.6%
  • Top marginal rate would be 43.4% (39.6% + 3.8%) when including the 3.8 % net investment income tax (NIIT) (excluding any state income tax)

Capital gains

  • For households over $1 million, capital gains rates would increase from 20% to 39.6%
  • Factoring in the NIIT, capital gains rates for those over $1 million would also be 43.4%

NIIT

  • The proposal states: “High-income workers and investors generally pay a 3.8% Medicare tax on their earnings, but the application is inconsistent across taxpayers due to holes in the law. The ARP would apply the taxes consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes.”

The language in the proposal is somewhat vague. It would seem NIIT would be extended to all income (for example, non-investment income, flow-through income) above the threshold, and the NIIT would be called the Medicare Tax. This would mean the NIIT applies to the sale of business assets.

Limiting step-up basis at death

  • Ends stepped up basis for gains in excess of $1 million ($2 million per couple)
  • No tax would be due for a gift to charity
  • Proposal includes an exception for family-owned businesses and farms that are given to heirs that continue to run the business

The proposal states: “The president’s plan will close this loophole, ending the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity.” It does not address what would happen at death.

Some are reporting this to mean, at death of a taxpayer, the taxpayer’s assets are treated as sold, and gain in excess of the $1 million/$2 million threshold would be subject to tax. Until legislation is finalized, we will not know if this is an accurate assessment.

The gain from the sale of a primary residence would also be excluded. This would mean a married couple could exclude $2.5 million ($1 million + $1 million + $500,000) in gain from taxation at death, assuming the exemption is portable.

Limited like-kind exchange tax deferral

  • Ends §1031 tax-free like-kind exchanges for real estate gains in excess of $500,000

Once again, there are limited details on the mechanics of how this would work. How is the $500,000 treated, and is it deferred? Is it subject to NIIT (remember under the AFP, all income over $400,000 is subject to NIIT)? Deferred from NITT?

Limitation of excess business losses [§461(l)]

  • Makes permanent the limitation on excess losses
    • Currently, business losses in excess of $250,000 ($500,000 MFJ), that are indexed for inflation and not deductible, become net operating losses (NOL) [§461(l)]
      • §461(l) expires in 2026

End of capital gain treatment for carried interests

  • Gives the IRS the authority to regulate paid tax preparers
    • Asks Congress to pass bipartisan legislation to give the IRS the authority to regulate

Per the proposal, “As preparers play a crucial role in tax administration and will be key to helping many taxpayers claim the newly-expanded credits, IRS oversight of tax preparers is needed.”

The end result of paid tax preparer regulation may be a great thing for those in practice looking to expand their operations or add staff. More regulation may result in more business opportunities, as it is anticipated some preparers will be leaving the industry and some taxpayers who are currently self-preparing may seek the advice of professionals due to increased complexity.

Other proposals

Other proposals are out there as well. Below are some you may be hearing about on the news or from your clients. We will provide a high-level discussion to create awareness, so you are able to address client concerns, if they do arise.

The House Ways and Means Chairman Richard Neal introduced the Building the Economy for Families Act on April 27, 2021 (a day prior to President Biden’s plan).

This proposal contains many of the same ideas as the AFP. Below are highlights of the proposed tax impacts:

CTC:

  • §24 of the IRC would be amended to include changes to the CTC
  • Fully refundable; amount increases to $3,000 per child ($3,600 under age 6)
  • ARP changes would be permanent

EIC:

  • Makes permanent the temporary expansion the eligibility and the amount of the earned income credit for taxpayers with no qualifying children (childless EIC)
  • Reduces minimum age to claim the childless EIC from 25 to 19 (except for certain full-time students), and the upper age limit is eliminated
  • Amounts are indexed for inflation and will be indexed beginning in 2022

Introduced in late March 2021 by senators Elizabeth Warren, Chris Van Hollen, Cory Booker, Sheldon Whitehouse and Bernie Sanders, Sensible Taxation and Equity Promotion (STEP) Act is another proposal to end the stepped-up basis loophole.

Also introduced in late March 2021 by Sanders, the 99.5 Percent Act contains changes to the current federal estate and gift tax rules.

As of today, none of the above proposals are legislation. They are simply proposals. We do not know what, if anything, will become final legislation.

NATP is here to keep you informed of any new legislation and our hope is the above as provided you with some of the information necessary to address any client concerns as they arise.

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Inflation adjustment, CTC and IRS recalculation By: National Association of Tax Professionals
May 12, 2021

The May 17 individual income tax return deadline is fast approaching. For many tax professionals, the deadline is bittersweet. It means we have timely filed returns for the majority of, if not all (hopefully…), our 2020 individual clients; we have requested an extension until Oct. 15, 2021, for those individuals who may need more time to file; and we filed any 2017 tax year individual returns with a claim for credit for refund of federal income tax (Notice 2021-21).

Tax practitioners should take a well-deserved break before turning their attention to their to-do list and action items. While the bulk of the filing season may be behind us, there is work still to be done, particularly of the planning type. In this blog we will touch on three items that a number of practitioners may be dealing with:

  • 2021 inflation adjustments changed by the American Rescue Plan Act of 2021 (ARP)
  • Basics of how taxpayers can get paid for the child tax credit
  • Issues surrounding the IRS recalculation of 2020 taxes, specifically:

2021 inflation adjustments

Based on client needs and the scope of our practices, many tax pros are performing tax planning services year-round. If you are not already performing these services, it may be something to consider because it cuts down on year-end surprises – both for the client and the tax professional. As part of the planning process, we need to have current information and be aware of any updates.

Each year the IRS updates certain amounts for inflation. In late 2020, the 2021 inflation amounts were announced. The ARP changed some of these amounts and, therefore, what was previously announced may no longer apply. In 2021, the IRS issued Rev. Proc. 2021-23 that provides for the ARP updated amounts. The ARP key inflation adjustments are presented below:

chart

The chart provides the inflation updated numbers for CTC, EIC and PTC that may be useful when offering planning services to your clients in these three areas.

Basics of how taxpayers can get paid for the child tax credit

For tax years beginning in 2021, the ARP temporarily expands the CTC rules concerning eligibility and amount. The temporary changes for 2021 include:

  • A qualifying child now includes a child who hasn’t turned age 18 by the end of 2021
    • What this means: for tax year 2021 only, 17-year-olds qualify for the CTC
  • An increase to $3,000 per qualifying dependent child age 17 or younger on Dec. 31, 2021
    • If the child is under age 6 on Dec. 31, 2021, the credit increases to $3,600
  • The CTC is fully refundable for most taxpayers

A provision of the ARP allows for temporary advance payments of the 2021 CTC. The IRS is tasked with establishing a program for the advance payment of the 2021 CTC. The IRS must make monthly advance payments in July through December 2021 that equal, in total, 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTC. The IRS will look at the taxpayer’s 2020 return (or 2019 return, if 2020 is not yet filed) to determine eligibility for the advance CTC payments.

The IRS must also create an online portal to allow taxpayers to:

  • Update information for relevant changes including:
    • Change to the number of qualifying children
    • Change to the taxpayer’s marital status
    • Significant changes in income
    • Any other factors determined by the IRS
  • Elect out of the advance payments

When the 2021 Form 1040, U.S Individual Income Tax Return, is filed, the amount of the taxpayer’s CTC allowed for 2021 is to be reduced by the advance payments the taxpayer received during the year. The advance payments will be direct deposited and the IRS is required to provide the taxpayer a notice of advance payments received no later than Jan. 31 of the calendar year following any calendar year during which it makes one or more advance payments of the CTC to the taxpayer (2021 notices will be sent no later than Jan. 31, 2022).

If a taxpayer receives advance payments in excess of the CTC allowable, the excess generally will need to be repaid unless their modified AGI is below certain thresholds, in which case the excess is reduced by a safe harbor amount. It is anticipated the IRS will be issuing additional guidance on the safe harbor provisions.

When working with clients who are eligible for the child tax credit, there are two options available to the taxpayer for 2021:

  • They can claim 100% of the 2021 CTC when they file their 2021 return in 2022, or
  • They can receive 50% of the CTC during July-December 2021, and claim the other 50% when they file their 2021 return in 2022

EXAMPLE

Ryan and Grace are entitled to a $6,000 CTC in 2021 for their children Albert and Sonya. Unless they elect out, the IRS will make an advance payment of $250 per month, per child ($500 total) from July to December 2021. They will receive a total of $3,000 ($500 x 6 = $3,000) from the advance payments.

When the couple files their 2021 tax return, they will claim the additional $3,000 credit. If the couple elects out, they will claim the $6,000 when filing their 2021 tax return.

Individual circumstances will determine what is the best approach, and now may be a great time to start having these conversations with your clients. It is anticipated more will be announced in the coming months regarding the portal.

Issues surrounding the IRS recalculation of 2020 taxes

The ARP exempts up to $10,200 in unemployment insurance (UI) benefits from federal taxation in 2020. The ARP also suspends the requirement that taxpayers increase their tax liability by all or a portion of their excess advance payments of the premium tax credit (excess APTC) for tax year 2020.

Because the law changed after some taxpayers had filed their 2020 tax returns, many returns were filed without taking advantage of the provision that allows for the UI exclusion and/or excess APTC tax credit.

The IRS announced:

  • UI: it will recalculate taxes on unemployment benefits and refunds to start in May
  • Excess APTC: taxpayers who already filed their 2020 tax return and have excess APTC do not need to file an amended tax return or contact the IRS

The IRS is saying it will recompute. The question is, should taxpayers accept the recomputation or should an amended return be filed for 2020 when taxpayers have the UI exclusion or excess APTC? As with most items, facts and circumstances will dictate.

Regarding the excess APTC, in most cases, the IRS recomputation should be correct and no amended return is needed. The repayment of the excess APTC is based on household income and filing status. In limited circumstances, an amended return may need to be filed.

EXAMPLE

Frank made a 2020 deductible IRA contribution, as he wanted to reduce his adjusted gross income (AGI)/modified adjusted gross income (MAGI) and therefore reduce the dollar amount of the APTC he had to repay. His 2020 return was filed prior to enactment of ARP.

Because he now qualifies for the benefit without the IRA contribution, Frank realizes there are better uses for the money. Before the due date of the 2020 tax return, Frank can withdraw the IRA contribution and earnings, or he can instruct the IRA trustees to transfer the contribution and earnings to a Roth IRA.

An amended return will need to be filed as Frank no longer has an IRA contribution deduction under either scenario.

For many taxpayers, the unemployment exclusion will create a lower AGI and MAGI than the amount the taxpayer reported when the 2020 was filed.

The IRS stated it will have all the information it needs from the original filed return to make adjustments to amounts on the return caused by the lower AGI/MAGI. For example, the IRS stated it will adjust the returns for taxpayers who claimed the EIC and may now be eligible for an increase in the EIC due to the UI exclusion.

While not specifically addressed by the IRS, it is assumed they will also be able to recompute the 2020 recovery rebate credits and the 2021 economic impact payment.

In some cases, it may be necessary to file an amended return. The original tax return may not have all the information the IRS needs to make recomputations based on reduced AGI/MAGI.

EXAMPLE

Zola filed her 2020 tax return in early 2021 and did not realize she could exclude her UI from income. She had a Schedule C business and claimed §179 depreciation on assets that were purchased. Now that her AGI/MAGI will be lowered by the UI exclusion, she could rethink her decision and file an amended return to revoke the §179 election.

Many reasons could exist as to why a taxpayer should file an amended return. Some of these may be related to a reduced AGI/MAGI resulting from the UI or PTC provision. Some may result from innocent mistakes.

With that said, if a decision is made to amend the 2020 return, it is a good idea to amend prior to the IRS doing its recalculations. This will avoid any confusion that may result with an amended return and recalculation with the same taxpayer.

Also, with the impact of COVID, many taxpayers are hurting for cash and filing an amended return will hopefully generate a refund sooner for the taxpayer.

There is nothing that prohibits a taxpayer from filing an amended return after receiving the recomputation. For those returns the practitioner prepared and filed prior to knowing about the UI exclusion and/or excess APTC, the practitioner could make the changes in their software and then review the IRS recomputation to see how it compares. If there is no difference in the calculation, an amended return may not be needed.

It is also highly recommended tax practitioners look at state rules, as some states tax UI benefits. An amended state return will most likely never be required for the excess APTC as the PTC provision affects federal tax liability, not federal taxable income.

CP09 Notice

Lastly, we want to touch on an issue many of our members have been commenting about.

A number of taxpayers have been receiving an IRS CP09 Notice similar to the one below:

photo1

The IRS is sending the notices to taxpayers who did not claim the EIC on their return, but who the IRS believes may be eligible. The notice instructs the taxpayer to complete Form 15111, and if the taxpayer qualifies based on the answers to the eligibility questions, they are to mail Form 15111 along with the notice’s bottom stub to the IRS address indicated on the stub. The IRS will use the information in Form 15111, along with the tax return, to determine if the taxpayer qualifies for EIC, for how much, and will then mail a check to the taxpayer within six to eight weeks.

While tax season may be coming to an end, another season of opportunities may be presenting itself. We hope you were able to gain something from the above that may help you in your practice and in dealing with clients. As practitioners, there are many things we encounter that we have no control over, but hopefully the information above gives you a good starting point to end the 2021 tax season on a high note and start planning for 2022.

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