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The U.S. Senate Approved a Vote to Extend the Paycheck Protection Program Application Period

On Tuesday, June 30, 2020, the U.S. Senate approved a vote to extend the Paycheck Protection Program (PPP) application period by five additional weeks until August 8, 2020.  The vote was passed by unanimous consent less than four hours before the PPP application window was scheduled to close with more than $130 billion in unspent loan money.

The legislation will require President Donald Trump’s signature for the program to continue. It now heads to the House of Representatives, which had finished voting before the bill was approved by the Senate.  Members of both chambers are expected to adjourn by the end of the week for the Fourth of July holiday and are scheduled to return in two weeks. The House would have to pass the measure and President Trump would have to sign it before the extension would take effect.

As of 5:00 p.m. ET on Tuesday, June 30, 2020, the U.S. Small Business Administration (SBA), which oversees the program with the Treasury Department, had approved nearly 4.9 million loans for a total of more than $520 billion. At midnight on Tuesday, June 30, 2020, the SBA stopped accepting loan applications. The unexpected extension is intended to provide small businesses additional time to apply for the approximately $129 billion in PPP funding remaining.

In early April, Congress created the PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The PPP was launched to aid the U.S. economy and assist small businesses facing economic hardships created by the COVID-19 pandemic. The program provides forgivable loans of up to $10 million per borrower that small businesses and other qualifying entities can use to cover payroll and other select costs, including mortgage interest, rent, and utilities.

PPP loan recipients can have their loans forgiven in full if the funds were used for eligible expenses and other criteria are met. The amount of the loan forgiveness may be reduced based on the percentage of eligible costs attributed to nonpayroll costs, any decrease in employee headcount, and decreases in salaries or wages per employee.

Tarlow is Here to Help – Please Contact Us with Questions

Tarlow Partners and staff members are closely monitoring tax-related legislation and regulations, and new guidance from the SBA and the Department of Treasury. We will continue to send updates and communications about relevant news and changing guidelines.

We are readily available to assist business owners in submitting Loan Forgiveness applications. If you have any questions about interpreting these new requirements and maximizing PPP loan forgiveness, please contact your Tarlow advisor for assistance.

Post-Pandemic Trends Shifting the Economy for Small Businesses Everywhere

While it’s true that the ongoing COVID-19 pandemic has created significant challenges for small and large businesses alike, there are also some opportunities resulting from this “new normal.”

Behaviors have changed during the Coronavirus outbreak, and some of these could end up being favorable for small businesses. There are a few core trends, in particular, that may be opportunities just waiting to be taken advantage of by a savvy entrepreneur.

The Shift Towards Digital is Picking Up Speed

With so many people spending more time indoors (even as lockdowns lift), it should come as no surprise that the shift towards digital business is picking up speed. Now, more than ever before, companies operating in the digital space are getting more and more successful. In large part, because the options to do almost anything else were severely limited during stay-at-home phases, and we’re still not back to pre-pandemic norms.

This means that if you’re a small business owner, you don’t need to worry about finding an ideal location and renting physical office space. Once you have your goods and services accounted for, all you need is a computer, a mobile device, and an Internet connection.

Likewise, a lot of companies are enjoying success right now, integrating e-commerce channels into their business that didn’t exist in the past. If you have a product that can be shipped (or even hand-delivered), you can integrate a digital storefront into your existing website and allow people to place orders that way.

Not only is it a great way to remain operational as COVID-19 drags on, but it’s also an opportunity to “future-proof” your operations in case mass shutdowns occur again in the future.

The Flexibility of Location Independence

Teleconferencing software like Skype and Zoom is certainly nothing new. The technology has existed in some form or another dating back to the 1990s. However, COVID-19 has ushered in a new era where businesses leverage these technologies to create a whole new period of location independence in terms of how they offer their goods and services.

One of the best examples of this is taking place in gyms. Fitness classes are regularly moving online so that people can still work out and stay fit right from the comfort (and safety) of their own homes. Healthcare professionals are offering therapy and similar services over technologies like Teladoc and Apple’s FaceTime. Professional service firms are holding online consultations and meetings, which saves all parties a tremendous amount of time, effort, and travel.

City Partnerships Give Businesses an Interesting Boost

Another fascinating trend brought about in the wake of COVID-19 has to do with the unique business boosts taking place in cities across America. Case in point: restaurants.

As states begin to reopen, restaurants are among the businesses facing stringent reopening guidelines. As an example, many restaurants are only allowed to operate at 50% capacity or less. Likewise, there are less-than-normal numbers of patrons who are enthusiastic about going into a physical restaurant to enjoy a “care-free night out on the town,” with virus fears and anxieties so high.

As a result, cities have partnered with restaurants to close streets for specific periods at night and on weekends so that those businesses can set up tables outdoors. Not only does this allow them to serve far more people than they could with their actual indoor option, but it’s a great way to promote social distancing and other safety measures while boosting small businesses.

The Era of Remote Work is Upon Us

Remote work has been getting more and more popular over the last several years; however, the ongoing COVID-19 pandemic has undoubtedly acted as an accelerant. With so many Americans under strict stay-at-home orders at one point and with all non-essential businesses closed, more people were working remotely than ever before. Not only did employees realize that they enjoyed the freedom and flexibility that came with it, but their employers are also quickly realizing that most of them are just as productive at home, if not more so.

Some employers have started to wonder if, even when things go “back to normal,” they should bother calling everyone back into the office again, or allow the remote work to continue. If employees are allowed to work from home a more significant percentage of the time (or entirely, in some cases), small businesses can potentially save an enormous amount of money on utilities alone. They likely won’t need to invest in large office spaces if far fewer people are using it, representing additional cost savings and money that can be funneled into other areas of the business.

Additionally, some studies indicate that people are more productive when working from home, thus increasing not only the quality of the work but the revenue those employees can generate as well.

The Future of Payments

Last but not least, we arrive at another trend that COVID-19 has highlighted over the last several months: the popularity of cashless and contactless payments.

Paying with cash is less prevalent in the time of coronavirus due to concerns around germs changing hands. Many businesses have even gone “cashless” and will only accept card payments.

“Contactless” payments take this one step further. Along with the various smartphone options (like Apple Pay and Google Pay), many debit and credit cards now include a contactless option where consumers simply wave or tap their card on the reader to pay.

The benefits of contactless payments for small businesses are as enormous as they are immediate. For starters, younger generations tend to prefer this to traditional payments, meaning that offering it as an option could be your ticket to attracting an entirely new audience.

Likewise, contactless transactions are faster than their traditional counterparts. So, not only are you giving people additional options in terms of how they pay for your goods and services, but you’re also creating an environment where you can execute more transactions in a faster, more secure way as well. It truly is a win-win situation, regardless of how you choose to look at it.

In the end, the COVID-19 pandemic has changed the way we do business, likely for good. But for every struggle that the coronavirus brought with it, it’s also clear that it unlocked a world of new opportunities for businesses, too. That’s why, as more and more states are opening up and things are slowly returning “to normal,” a lot of small businesses are asking themselves how they can continue applying some of these new strategies for the long-term.

If your business is facing challenges keeping up with the changing demands of your customers due to COVID-19, please contact us. Your Tarlow advisor can help you seize this chance to pivot and embrace new opportunities to grow.

SBA Releases Final Rule on Loan Increases for Partnerships

On Wednesday, May 13, 2020, the Small Business Administration (SBA) released Interim Final Rule 9 (“IFR 9“), which provides important guidance for partnerships on loan increases.

As an update, partnerships that received a Paycheck Protection Program (PPP) loan and only included the partnership’s employees in the loan amount calculation are given the option of submitting a request to the SBA to increase the PPP loan amount to include partner compensation. The request would allow the lender to make an additional disbursement, although the previously issued Interim Final Rule on Disbursements (Interim Final Rule – Disbursements of PPP Proceeds) requires PPP loans to be disbursed in a single disbursement. Although an additional disbursement is allowed, the SBA clearly stated that maximum loan amounts still apply, including $10 million for an individual borrower or $20 million for a corporate group.

As background, on April 14, 2020, the SBA released an interim final rule (“IFR 2”) to provide guidance for individuals with self-employment income. The rule, “Guidance on SBA Loans for Self-Employed,” stated, “if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.”

On April 28, 2020, the Department of the Treasury posted an interim final rule (“IFR 4”) that provided an alternative criterion for calculating the maximum loan amount for PPP loans issued to seasonal employers.  It was expected that compensation to partners was not to be included in calculating the PPP loan amount.  With concerns of diminishing PPP funds, many partnerships filed their applications quickly, and without including partner compensation in their calculations.  The Interim Final Rule offers further options for ‘partnerships that received a PPP loan that did not include any compensation for its partners’ on their application.

Tarlow is Here to Help!

We are readily available to assist partnerships who applied for a PPP loan and did not include partner compensation as part of the loan amount calculation.

Please contact your Tarlow advisor for assistance and to discuss how to calculate partner income for the loan amount increase, or how to interpret and document spending requirements for PPP forgiveness.

Unemployed by COVID-19? Special Benefits May Apply to You

Article Highlights:

  • Pandemic Unemployment Assistance
  • Benefit Extensions
  • Self-employed Coverage
  • Taxability
  • Withholding – Estimated Payments

The CARES Act includes Pandemic Unemployment Assistance (PUA) provisions that extend and supplement state-provided unemployment insurance. These provisions are intended to lessen the financial burdens on individuals who have lost their jobs because of the COVID-19 emergency by allowing states to extend unemployment benefits up to 13 weeks and waiving the standard one-week waiting period. The provisions also continue the benefits to individuals who are self-employed, seeking part-time employment, or otherwise ineligible for regular unemployment compensation.

To qualify for PUA benefits, you must not be eligible for regular (unrelated to the COVID-19 crisis) unemployment benefits. You should be unemployed, partially unemployed, or unable or unavailable to work because of specific health or economic consequences of the COVID-19 pandemic.

The PUA program provides up to 39 weeks of benefits, which are available retroactively starting with weeks of unemployment beginning on or after January 27, 2020, and ending on or before December 31, 2020. The number of benefits paid out will vary by state and are calculated based on the weekly benefit amounts (WBAs) provided under a state’s unemployment insurance laws. Under the CARES Act, the WBA may be supplemented by the additional $600 in unemployment assistance provided per week under the Cares Act.

The individual states administer the unemployment benefits, and benefits must be applied for through each state.

NOTE: At the time this article was prepared, many states were struggling to implement the provisions of the PUA program, making it difficult for individuals to access these benefits quickly.

It is also essential to understand that unemployment benefits are taxable income for federal tax purposes and also taxable by most states. However, there are exceptions, and these states do not tax unemployment benefits.

Alabama
Alaska*
California
Florida*
Montana
Nevada*
New Hampshire**
New Jersey
Pennsylvania
South Dakota*
Tennessee**
Texas*
Virginia
Washington*
Wyoming*

*These states do not have a state income tax.
** These states do not have a state income tax but do tax interest and dividend income.

It may be appropriate for certain individuals to have federal taxes withheld from their unemployment compensation by using Form W-4V. Wherever the unemployment is taxable by a state, the state’s estimated taxes can be paid. Not prepaying taxes on unemployment benefits can lead to unpleasant surprises for some individuals when they file their 2020 tax returns.

If you have questions related to how unemployment income will impact your 2020 taxes and whether you should have income tax withheld, please contact your Tarlow advisor.

When Will I Get My Stimulus Check?

Article Highlights:

  • Direct Deposit Stimulus Payments
  • Reasons You May Not Be Receiving a Stimulus Payment
  • Stimulus Payment Phase-Out
  • Payment Schedule by Check
  • Non-Filers

The IRS has already sent out 80 million stimulus payments to taxpayers that included their direct deposit information on their most recently filed 2019 or 2018 return. So, if you had filed either your 2019 or 2018 return before the direct deposits were issued, you should have already received the money in your bank account, unless:

  1. You changed bank accounts since you filed your return, which means you will be receiving your stimulus payment by check later.
  2. You owe back child support, in which case the payment will go to satisfy your back-child support.
  3. Your payment was reduced or eliminated because of your higher income. The credit is phased out by 5% of the taxpayer’s adjusted gross income (AGI) that exceeds the filing status threshold. The following table illustrates the phaseouts by filing status and AGI.
RECOVERY REBATE CREDIT AGI PHASEOUTS
Threshold Complete Phase-Out
Unmarried Taxpayers (as well as Married Filing Separately) $75,000 $99,000
Head of Household $112,500 $136,500
Married Taxpayer Filing Joint $150,000 $198,000

Stimulus Payments by Check – If you are receiving payment by check, the checks are being issued to the lowest income individuals first, where the need is the greatest followed by others with increasing incomes. Here is the release schedule for the payments by check.

SCHEDULED STIMULUS PAYMENTS VIA CHECK
Adjusted Gross Income Issue Issue Date
Less than $10,000 April 24
$10,001 to $20,000 May 1
$20,001 to $30,000 May 8
$30,001 to $40,000 May 15
$40,001 to $50,000 May 22
$50,001 to $60,000 May 29
$60,001 to $70,000 June 5
$70,001 to $80,000 June 12
$80,001 to $90,000 June 19
$90,001 to $100,000 June 26
$100,001 to $110,000 July 3
$110,001 to $120,000 July 10
$120,001 to $130,000 July 17
$130,001 to $140,000 July 24
$140,001 to $150,000 July 31
$150,001 to $160,000 August 7
$160,001 to $170,000 August 14
$170,001 to $180,000 August 21
$180,001 to $190,000 August 28
$190,001 to $198,000 September 11

Non-Filers – If you have not filed a tax return, you may or may not need to take any action to receive your stimulus payment.

For those that are receiving Social Security, SSI disability, survivors, or Railroad Retirement or veterans benefits will automatically receive a stimulus payment for themselves ($1,200). If they have child dependents under the age of 17, they will not receive the $500 stimulus payment for the dependent unless they go the IRS Get My Payment tool and enter the dependent information. April 22 was the cut off date for Social Security and Railroad Retirees to update that information.

Other non-filers will not receive a rebate unless they complete the IRS Non-Filer Tool.

Keep in mind the stimulus payments are advance payments for a refundable credit that can be claimed on your 2020 tax return. So, if you miss out on the advance payment, you will receive the payment on your 2020 tax return or substitute process provided by the IRS for non-filers.

The IRS also provides an extensive Q&A related to rebate issues.

If you have any questions, please contact your Tarlow advisor.

COVID-19 Webinar on Friday, April 3, at 1 PM (ET) – Unpacking the Economic Stimulus Plan: Impacts on Your Dental Practice

Tarlow Invites You: COVID-19 Webinar
Unpacking the Economic Stimulus Plan: Impacts on Your Dental Practice

On Friday, April 3, 2020, at 1:00 PM to 2:00 PM (ET), our CPA channel affiliate partner, Aprio, will host a complimentary webinar to unpack the historic $2 trillion Coronavirus Aid, Relief, and Economic Security Act and what it means to dental practices and their owners.

During the webinar, you will learn about the following topics: 

  • Final interpretations of legislation and how they affect your practice
  • Leveraging SBA loan opportunities to reopen your business
  • Understanding 15-year qualified improvement property options
  • Breaking down 401k clauses and options
  • Steps you can take today to maximize your tomorrow

Speakers on the panel include: 

  • Brad Mckeiver, Partner and Dental Accounting Expert at Aprio
  • Tommy Lee, Partner-In-Charge of Retail, Franchise, and Hospitality at Aprio
  • Andrew Shaul, Dental Legal Counsel at The Shaul Law Firm, PC
  • Evelyn Horne, Dental Practice Management Expert at Evelyn Home, Inc.

Register Today

Tarlow CARES Act Update

The Senate passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), to provide additional financial assistance to individual and business taxpayers due to the coronavirus pandemic. As of this writing, the House just passed the CARES Act and it is now being sent to President Trump for signature.

Amendments to the Families First Coronavirus Response Act

The CARES Act changes sections of the Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020. One update is that employers subject to the FFCRA may elect to provide even more paid leave than stated by the FFCRA.  Note, the related payroll tax credits are capped at the FFCRA’s mandatory paid leave wage amounts.

In addition, the CARES Act expands eligible employees under the paid leave provisions of the FFCRA to workers who were laid off not earlier than March 1, 2020, had worked for the employer for at least 30 of the last 60 calendar days prior to being laid off, and were rehired by the employer.

Employers subject to the FFCRA may receive an advance, including any refundable portions, of FFCRA payroll credits to help cover the expense of providing the required paid leave under the FFCRA.

CARES ACT INDIVIDUAL PROVISIONS

Recovery Checks

Individual taxpayers will receive a recovery rebate check of $1,200 per individual and $2,400 for married couples filing jointly, plus $500 for each qualifying dependent child. The recovery rebate phases out for taxpayers whose adjusted gross income exceeds $150,000 for joint returns, $112,500 for head of household, and $75,000 for all other taxpayers.

The amount a taxpayer receives is based on information from the taxpayer’s 2019 tax return; if the taxpayer has not yet filed a 2019 return, the amount is based on the 2018 tax return.

Retirement Plans

The bill liberalizes the retirement plan rules, for 2020, for premature distribution penalties, plan loans and required minimum distributions (RMDs).

The 10% premature early withdrawal penalty is waived for distributions of up to $100,000 from qualified retirement accounts and individual retirement accounts for coronavirus-related purposes. In addition, the federal income tax on such distributions can be paid over a three-year period. The law also provides that these distributions can be recontributed back to the plan within a three-year period without affecting that year’s contribution cap.

The bill provides more flexible rules concerning loans from certain retirement accounts for coronavirus-related relief. The maximum amount of loans (when combined with existing loans) which can be taken from the plan is the lesser of $100,000 (up from $50,000) or 100% of the participant’s accrued benefit (up from 50%).

Charitable Contributions Deduction Modifications

Taxpayers who do not otherwise elect to itemize deductions are allowed an above-the-line deduction in 2020 for up to $300 for charitable contributions made in cash (not stock) to any qualifying Section 501(c)(3) public charity, excluding donor-advised funds.

In addition, for individuals who itemize, the CARES Act temporarily increases limitations on deductions for charitable contributions made in 2020. For individuals, the 60 percent of adjusted gross income limitation is suspended for 2020 for cash contributions to qualifying organizations, excluding donor-advised funds. For contributions of food inventory, the limitation is increased from 15 percent to 25 percent. Excess contributions may be carried forward to future years based on the existing charitable contribution carryforward rules.

Employer Payments of Student Loans Assistance Program

Through December 31, 2020, employers may provide a student loan repayment benefit of up to $5,250 annually to employees tax-free. This extends to both new student loan repayment benefits and other educational assistance provided by an employer under current law.

Expanded Unemployment Insurance Benefits

The CARES Act provides increased unemployment insurance benefits for individuals (including those who are self-employed) who become unemployed, partially unemployed or are unable to work due to COVID-19 on or after January 27, 2020, and on or before December 31, 2020. In general, the unemployment benefit a recipient receives is increased by $600 per week. Benefits may vary by state.

CARES ACT PROVISIONS FOR SMALL BUSINESS OWNERS

The 7(a) loan program, administered by the U.S. Small Business Administration (SBA), provides financial assistance to small businesses. Overall, the CARES Act authorizes an additional $349 billion for general 7(a) business loans. For SBA Express loans, the statutory $350,000 limit is increased to $1 million through December 31, 2020.  In general, the SBA responds to Express loans within 36 hours, compared to standard 7(a) loans, which may take weeks to process.

Recipients of 7(a) loans may be eligible for loan forgiveness on covered loans in an amount equal to the sum of the costs incurred on or after February 15, 2020, and on or before June 30, 2020, due to payroll cost, mortgage interest payments, rent or utility payments.

In addition, the CARES Act gives the SBA authority to provide paycheck protection loans to help employers cover costs, including wages, paid leave and state taxes on employee wages. These benefits are available to employers with no more than 500 employees, including nonprofit organizations.

Employee Retention Credit

An eligible employer is allowed a credit against applicable employment taxes for each calendar quarter equal to 50% of qualified wages for each employee for such calendar quarter.

  • The amount of qualified wages for any employee taken into account by an employer for all calendar quarters is limited to $10,000.
  • The credit is limited to the employment taxes owed as reduced by other credits for all employees of the eligible employer for such calendar quarter.

An eligible employer is one who (a) was carrying on a trade or business during calendar year 2020; (b) with respect to any calendar quarter for which (i) operations are fully or partially suspended due to orders from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19 or (ii) in which (beginning in first calendar quarter after 12/31/2019) there has been a significant decline in gross receipts (i.e., less than 50% gross receipts for the same quarter in the prior year and ending with calendar quarter for which gross receipts are greater than 80% same calendar quarter in prior year). Tax-exempt organizations can also benefit from this credit.

Employer and Self-Employer Individual Deferral of Payroll Taxes

Employers and self-employed individuals can defer the payment of the employer portion of employment taxes or self-employment taxes due during the “payroll tax deferral period” to December 31, 2021, and December 31, 2022.  50% of the deferred taxes will be required to be paid on these dates.  Penalties will not apply for failure to make timely deposits for withholding these amounts.

The Payroll Tax Deferral Period is defined as the period beginning on date of enactment to January 1, 2021. This does not appear to be retroactive to January 1, 2020.

Net Operating Loss (NOL) Rules

Rules limiting the use of net operating losses under the Tax Cuts and Jobs Act (TCJA) are suspended under the Stimulus Bill.

  • NOLs from 2018, 2019 or 2020 are eligible to be carried back for five years.
  • Additionally, the 80% limit on use of NOL carryforwards is also temporarily removed so that the NOL can fully offset income.

Limitation of Individuals’ Use of Business Losses

Under the TCJA, non-corporate taxpayers’ net business losses were limited under IRC section 461(l) to $250,000 ($500,000 for a joint filer). The Stimulus Bill would permit use of net business losses without limit for the 2018 tax year through 2020.

Corporate Alternative Minimum Tax Credit Refund

Under the TCJA, a C corporation with alternative minimum tax credits was entitled to a refund of these credits over a four-year period — 2018, 2019, 2020 and 2021. Under the Stimulus Bill, the corporation can receive the refund over a two-year period 2018 and 2019. Furthermore, if there will be any delay in filing the 2019 C corporation return, an election can be made to include the entire refundable amount in 2018.

Business Interest Limitation Under IRC Section 163(J)

The TCJA includes a limitation on the use of net business interest expense to 30% of Adjusted Taxable Income. The Stimulus Bill amends this rule for 2019 and 2020 and increases the limit from 30% of Adjusted Taxable Income to 50%. Additionally, since it is likely that 2020 income will be lower than in 2019 due to the current economic circumstance, an election can be made to use the 2019 Adjusted Taxable Income for the 2020 tax year.

Bonus Depreciation

The Tax Cuts and Jobs Act intended to permit immediate write-off of costs related to Qualified Improvement Property. Due to a drafting error, this provision was not put into that legislation and caused QIP only to be eligible for depreciation over 39 years. The Stimulus Bill fixes this drafting error and specifically permits bonus depreciation to be taken on qualified costs retroactively. This allows amendment of 2018 and 2019 filed returns and provide a source of cash, particularly for those in the hospitality industry.

Excise Tax Exemption

The bill also provides a temporary exception from excise tax on alcohol which is used to produce hand sanitizer.  We are waiting to see if the House of Representatives made changes to these provisions. Clearly, they are all intended to provide additional cash to taxpayers.

Tarlow is Here to Help — Contact Us with Questions

At Tarlow, our Partners and staff members are closely monitoring tax-related legislation and regulations. We will continue to update you by sending communications about relevant news and changing guidelines.  If you have any questions, please contact your Tarlow advisor.

Mortgage Insurance Premium Deduction Retroactively Extended

Article Highlights

  • Appropriations Act of 2020
  • Amended Return for 2018
  • Qualifications for the Deduction
  • Qualified Mortgage Insurance

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included several tax law changes, including retroactively extending specific tax provisions that expired after 2017 or were about to expire, some retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.

For tax years 2007 through 2017, when taxpayers itemized deductions, they could deduct the cost of premiums for mortgage insurance on a qualified personal residence as home mortgage interest.

This deduction has been retroactively extended back to 2018 and through 2020. If you paid premiums for mortgage insurance in 2018 or were amortizing prepaid mortgage insurance premiums from an earlier year’s home purchase, you may be able to amend your 2018 return for a tax refund.

To be deductible:

  • The premiums must have been paid in connection with acquisition debt, which is debt incurred to purchase or substantially improve a home. (Note: acquisition debt includes refinanced acquisition debt but not equity debt.)
  • The mortgage insurance contract must have been issued after December 31, 2006.
  • It must be for a qualified residence (taxpayer’s first and second homes).
  • The premiums must have been paid or accrued after December 31, 2006, and before January 1, 2021.
  • The cost of the insurance does not affect the $1,000,000/$750,000 (or grandfathered debt) limitation for acquisition debt.
  • The deductible amount of the premiums ratably phases out by 10% for each $1,000 by which the taxpayer’s adjusted gross income (AGI) exceeds $100,000 (10% for each $500 by which a married separate taxpayer’s AGI exceeds $50,000). The deduction is totally phased out if the taxpayer’s AGI is over $109,000 ($54,500 for married filing separate).

Qualified mortgage insurance means mortgage insurance provided by the:

  • Dept. of Veterans Affairs (VA),
  • Federal Housing Administration (FHA), or
  • Rural Housing Services (RHS) as well as
  • Specific private mortgage insurance.

If you have any questions related to the mortgage insurance deduction or think you might qualify for the deduction in 2018 and would like to have an amended return prepared, please contact us.

IRS Letters: Tax Scam or Something You Need to Address?

Your taxes contain an array of sensitive information, from financial data to your Social Security number or tax ID number. Because of this, scammers often attempt to impersonate the IRS or another tax authority to obtain your information. It can be challenging to tell when the IRS is really seeking information versus when you may be the target of a scam.

To help you determine whether the letter you received is a scam or something you need to address, consider the following tips and information.

What Are the Next Steps If You Receive an IRS Letter?

If you receive a legitimate letter from the IRS, you need to take action to address whatever the IRS requires. There are many situations where the IRS is merely sending you a notice, and you may not have to do anything. However, if the IRS is requesting additional information, it is essential to completely understand what they need and act quickly to address the letter.

Tax letters can be confusing because it may not be clear what the IRS needs or how you should get the information to them. As your tax professional, we can help you decipher the tax letter and share the right information with the IRS. We are also better able to tell a legitimate letter from a scam as well.

It is of the utmost importance that you contact us to determine the legitimacy of the IRS notice before any other steps.

Why Would You Receive a Tax Letter?

The IRS almost always initiates a conversation with a taxpayer by sending a letter first. That means that if the IRS needs to speak with you for any reason, you will receive an IRS letter in the mail. Keep in mind that phone calls or emails from the IRS without a corresponding letter are probably part of a scam, rather than a legitimate contact from the IRS.

Some of the most common reasons that the IRS sends letters are:

  • You have a tax balance due
  • The IRS has a question about your tax return
  • Identification verification
  • To notify you about a change in your tax return
  • You are due a smaller or larger tax refund
  • To get additional information about your taxes
  • Notification about a delay in processing your return

Read the letter carefully to determine what the IRS needs and how you should respond to any tax problems. Some IRS letters do not require that you take any action.

How Often Does the IRS Send a Tax Letter?

The IRS sends millions of letters to taxpayers every year for various reasons. In most cases, the letters do not deal with audits. The IRS audits just 0.5% of all returns submitted, which amounts to approximately one million tax returns.

What Are the Methods of Communication That the IRS Uses to Contact Taxpayers?

In most cases, communication with the IRS will start with a letter. However, there are a few more time-sensitive situations where the IRS will use a different method of communication to initiate contact. Delinquent tax returns and overdue tax bills are the most common reason. The IRS can occasionally show up to your home or business unannounced to conduct an audit or as part of a criminal investigation. Note that these circumstances are rare; most contact starts with an IRS letter.

Keep in mind that the IRS will never ask for a specific type of payment method, and they do not request payment for overdue taxes over the phone.

How to Avoid a Tax Scam

IRS letters that are actually scams can seem legitimate, but they will generally have a few errors or omissions that signify that the correspondence is not official. For example, IRS letters will have an identifying number in the upper right-hand corner that matches a file with the IRS. If you call an official IRS number, you should be able to use that identifying number to talk with the right person. Double-check the number on your notice with phone numbers used for the IRS online.

Other things you can do to avoid scam include:

  • Never give debit, credit, or bank account information out over the phone
  • Never respond to social media or text messages that seemingly come from the IRS; the IRS does not contact people in this way
  • Check your tax account information online at IRS.gov
  • Read your tax letter carefully to check for visible signs of errors or omissions

Being careful and not acting too quickly can help you avoid scams and further tax problems. If you receive a letter from the IRS, it’s essential to contact us right away. We can put our tax and IRS expertise to work, ensuring the contact you’ve received is legitimate. 

New Twist for Kiddie Tax with a Refund Opportunity

Article Highlights:

  • Appropriations Act of 2020 
  • Children’s Tax-Filing Requirements 
  • Two Methods for 2018 and 2019 
  • Amendment Possibility for a Dependent Child 
  • Standard Deduction 
  • Wages 
  • Self-employment Income 
  • Investment Income 
  • Parents’ Election 
  • Who Is Responsible for Filing? 
  • Retirement Savings Opportunity 
  • Signing the Return 

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included several tax law changes, including retroactively extending specific tax provisions that expired after 2017 or were about to expire, some retirement and IRA plan modifications, and other changes that will, as a whole, impact a large portion of U.S. taxpayers. This article is one of a series of articles dealing with those changes and how they may affect you.

Your dependent child who worked during the year or had investment income, such as interest or dividends, may be required to file a tax return, depending upon the type and amount of the income. Years ago, to prevent parents from putting their investments in their children’s names to avoid or significantly reduce the tax on their investment income, Congress passed what is commonly referred to as the kiddie tax. The kiddie tax taxes children’s income in excess of a small allowance at the parent’s top tax rate.

More recently, as part of the 2017 tax reform, Congress modified the kiddie tax structure, so that the children’s investment income above the small allowance ($2,200 for 2019) is taxed at the fiduciary tax rates*, which can very quickly reach the maximum tax rate. On the other hand, the tax reform virtually doubled the standard deduction (it is $12,200 for 2019 for someone using the single filing status), providing children with substantial tax-free income from working.

That change to the kiddie tax structure created an unintentional tax increase for survivors of service members and first responders who died in the line of duty. As a result, Congress has decided to scrap the new method, which used fiduciary rates, and to revert to the original kiddie tax computation, beginning in 2020, resulting in the child’s net unearned income being taxed at the parents’ tax rate, if it’s higher than the child’s tax rate.

Amended Return Possibility – Taxpayers can choose whichever method provides the lowest tax for 2018 and 2019 and can amend the 2018 return if it allows for a better outcome. This will especially benefit taxpayers with substantial unearned income.

Unearned income generally includes investment income such as taxable interest, dividends (including capital gain distributions), and capital gains, as well as rents, royalties, pension income, survivor benefits, the taxable part of Social Security benefits, taxable scholarship and fellowship grants not reported on Form W-2, and other income types.

A dependent child is defined as being either under the age of 19 during the tax year or under 24 if he/she is a full-time student. Also, to be a dependent, the child needs to live with you for more than half of the year (unless he/she is away due to a temporary absence that includes living away from home while attending school). Although there are no support requirements, the child cannot be self-supporting. When considering whether the child is self-supporting, don’t confuse support for the child with the child’s income. Saved income is not used for support.

How a Child’s Income Is Taxed

  • Wages – When children only have earned income (wages), they file their own tax return and can claim the standard deduction. Thus, only their earnings above the standard deduction, which is $12,200 for 2019, is subject to income tax. As a result, if their earnings are less than the standard deduction, they need not file a tax return unless it would need to be submitted for them to claim a refund of withheld income taxes. 
  • Self-Employed Income – If your child is an entrepreneur and has net income from self-employment, then in addition to income tax, he/she may owe self-employment tax. Self-employment tax is only assessed if the net self-employment income is above $433. Thus, if your child’s self-employment net income is more than $433, he/she must file a return, even if the total income is less than the standard deduction. 
  • Investment Income – If your children only have investment income, such as interest and dividends, their standard deduction for 2019 will be $1,100. For the kiddie tax computation, any investment income over $2,200 (the special allowance previously mentioned in this article) will be taxed, either at fiduciary rates – which start at 10% and reach 37% when the investment income above the special allowance reaches $12,750 (the TCJA method) – or at their parents’ marginal tax rate (the pre-TCJA method that Congress brought back). 
  • Earned Income and Investment Income – This is the most complicated because the standard deduction is the greater of $1,100 or the child’s earned income plus $350. Still, it should not exceed the $12,200 standard deduction for a single individual, while the special allowance for the kiddie tax is $2,200. Generally, in this situation and using the TCJA method, investment income over $350 will be taxed at fiduciary rates, and earned income over the remaining standard deduction will be taxed at the regular single tax rates. Otherwise, if the TCJA method isn’t used, the child’s tax will be the greater of the tax on all of the child’s income or the sum of the tax on the child’s earned income plus the child’s share of the allocable parent tax. The TCJA method is only available for 2018 and 2019. 

Parents’ Election – Parents may elect to include their child’s interest and dividend income (including capital gain distributions) on their own tax return if the total is less than $11,000, instead of the child filing a return of his/her own. However, this election cannot be made if the child has other types of income, either earned or unearned. Also, filing in this manner may result in a more significant tax liability.

Who Should Be Responsible for Filing the Child’s Return? Whether your children’s income is earned or unearned, they may be too young to prepare their tax returns. Then, the responsibility to do so is yours. If your children can file their return, you may want to provide them with this important lesson of being a taxpayer. However, if you make them responsible for submitting their return, make sure they check the “dependent of another” box, or else the IRS will deny you the dependency for the child and create a mess that will be difficult to straighten out.

Retirement Savings Opportunity – If your children have earned income, they can set aside money in an IRA for their eventual retirement. However, they may be reluctant to give up any of their hard-earned money from their summer job or regular employment. A child or young adult is probably not at a stage in life to begin thinking about retirement. However, if you, a grandparent, or others have the financial resources to do so, the amount of an IRA contribution could be gifted to the children, giving them a great start toward their retirement savings and hopefully a continuing incentive to save for their retirement. The maximum amount they can contribute for 2019 is the lesser of their earned income or $6,000.

Roth IRAs are a better alternative; unlike traditional IRAs, Roths provide tax-free income at retirement. However, the contribution to a Roth is not deductible; thus, income over $12,200 would not be tax-free. Even so, the tax rate at the lower-income level is only 10%, and it may be worth paying a small tax now to gain the tax-free retirement income provided by a Roth IRA. An IRA contribution for 2019 can be made up to April 15, 2020.

Signing the Return – Parents who prepare their children’s return can either have them sign for themselves or do so on their behalf, thus signing for them as their guardian or parent. Preparing your children’s return is a good idea in either case, as this notation provides with you the ability to speak on your child’s behalf if the IRS audits or questions the return.

A child’s return can be tricky to prepare. Please contact us for your child’s tax-preparation needs. 

*Fiduciary tax rates are the income tax rates for trusts and estates.