Monthly Archives: February 2020

Congress Green-Lights Some Alternative Vehicle Credits

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Article Highlights:

Hybrid Credit (Expired)
Four-Wheeled Plug-In Electric Drive Vehicle Credit
Qualified Fuel Cell Motor Vehicle Credit
Two-Wheeled Plug-In Electric Vehicle (Motorcycle) Credit
Alternative Fuel Vehicle Refueling Property Credit
Refund Opportunity

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which includes a number of tax law changes, including extending certain tax provisions that expired after 2017 or were about to expire, a number of 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. To encourage U.S. taxpayers to move away from gasoline-powered motor vehicles, over the years, Congress has provided various tax credits for purchasing electric or alternative fuel vehicles. These credits generally come with an expiration date or a sales limitation. For example, from 2006 through 2010, a credit was available to taxpayers who were purchasing a hybrid vehicle – this was when hybrids such as the Toyota Prius were beginning to take off in the U.S. auto market. Since then, the tax credit that has drawn the most attention is the 4-Wheeled Plug-In Electric Drive Vehicle Credit, created by Congress in 2009. Four-Wheeled Plug-In Electric Drive Vehicle Credit – This nonrefundable credit is worth up to $7,500 for the purchase of new electric vehicles and has been a stimulus for car companies to manufacture ‘green’ vehicles and an incentive for consumers to purchase such vehicles. Although there is no specific date in the future when this credit will expire, the number of vehicles each manufacturer can sell that can qualify for the credit is limited. That limit is enforced by phasing out the credit by manufacturer once the manufacturer sells its 200,000th electric vehicle. As a result, Tesla vehicles purchased after 2019 won’t qualify for a credit, and qualifying vehicles made by Cadillac and Chevrolet and purchased in the first quarter of 2020 are eligible for just a partial credit, or for no credit if bought after March 31, 2020. The following table shows the current credit phaseouts:

VEHICLES BEGINNING PHASEOUT IN 2019

Date Acquired >>> MANUFACTURER

Before 2019

Jan.–Mar. 2019

Apr.–June 2019
July–Sept. 2019
Oct.–Dec. 2019
Jan.–Mar. 2020
After Mar. 2020

Tesla*
$7,500
$3,750
$3,750
$1,875
$1,875
$0
$0

Chevrolet*
$7,500
$7,500
$3,750
$3,750
$1,875
$1,875
$0

Cadillac*
$7,500
$7,500
$3,750
$3,750
$1,875
$1,875
$0

*All qualifying models
As Congress developed the tax provisions included in the Appropriations Act of 2020, passed late in 2019, there was some hope that the 200,000th-vehicle limit would be increased so that future sales of vehicles from the manufacturers already affected by the phaseout would be eligible for the credit. This didn’t happen. However, Congress did extend through 2020, the following lesser known credits that had originally expired at the end of 2017: Qualified Fuel Cell Motor Vehicle Credit – The credit equals a base credit amount, which depends upon the vehicle’s weight class plus, for passenger cars or light trucks (vehicles weighing 8,500 pounds or less), an additional amount that depends upon the vehicle’s rated fuel economy, as compared to a base fuel economy. A qualifying fuel cell vehicle must be propelled by power derived from one or more cells that directly convert chemical energy into electricity by combining oxygen with hydrogen fuel stored onboard the vehicle. A passenger automobile or light truck must meet the Clean Air Act’s emissions standards for that make and model year of vehicle. The vehicle, which must be made by a manufacturer, must be new and acquired for use or lease and not resale. The credit amount is $4,000 if the vehicle has a gross vehicle weight rating (GVWR) of not more than 8,500 pounds or $10,000 if the vehicle has a GVWR of more than 8,500 pounds but not more than 14,000 pounds. For heavier vehicles, the credit is even more. And for a qualified fuel cell motor vehicle that is a passenger car or light truck, the credit is further increased by $1,000 to $4,000, based on specified fuel efficiency levels. This credit was previously allowed through 2017 and was retroactively reinstated for 2018 and extended through 2020 by the Appropriations Act of 2020. Two-Wheeled Plug-In Electric Vehicle (Motorcycle) Credit – A credit equal to 10% of the cost, for a maximum credit of $2,500 per vehicle, of electric drive (2-wheeled) motorcycles was retroactively reinstated for 2018 and extended through 2020. To qualify, the motorcycle must be propelled by a rechargeable battery with a capacity of at least 2.5 kilowatt hours that can be recharged from an external source. It must weigh less than 14,000 pounds; be capable of going 45 mph or more; and be manufactured primarily for use on public streets, roads, and highways. Used motorcycles don’t qualify. Alternative Fuel Vehicle Refueling Property Credit – This credit, which has also been reinstated for 2018 and extended through 2020, is 30% of the cost of the refueling property put in service during the year, with the following credit limitations: the maximum personal use credit is $1,000 per home and is non-refundable, while the maximum credit for depreciable property used in business is $30,000 and is part of the General Business Credit. Qualified alternative fuel vehicle refueling property is any property (other than a building or its structural components) used to (1) store or dispense a clean-burning fuel into the fuel tank of a motor vehicle propelled by that fuel, but only if the property is located at the point where the fuel is delivered into the vehicle’s tank, or (2) recharge an electric vehicle, provided the recharging property is located at the point where the vehicle is recharged. Refund Opportunity – If you qualify for any of the reinstated credits for 2018, your 2018 return can be amended to claim the credit. Generally, the amended return will need to be filed by April 15, 2022. If you have questions about any of the credits discussed in this article or would like assistance in amending your 2018 return, please give this office a call.

Posted in Tax

Video Quick Tips: Good IRA News for Retirees

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Now as part of the SECURE Act that was included in the Appropriations Act of 2020, and effective for tax years beginning in 2020, individuals who otherwise qualify can make traditional IRA contributions at any age.
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Congress Does Away with the Stretch IRA

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Article Highlights:

Taxability of Distributions
Stretching Distributions
SECURE Act Changes
Ten-Year Rule
Spouse Exception
Other Exceptions
Naming Beneficiaries

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers. This article is one of a series dealing with those changes and how they may affect you. Some members of Congress have, for some time, expressed their displeasure with the so-called stretch IRAs that have permitted some beneficiaries, such as a young child or a grandchild, to extend the payout period from the IRAs they inherited for decades. When someone inherits an IRA or retirement plan, with the exception of a Roth IRA, the distributions from the retirement plan are generally taxable to the beneficiary. In the past, beneficiaries have often been able to use a lifetime distribution option to stretch the payments over a long period of time, growing the account with deferred earnings and lessening the overall taxes on the distribution. If the beneficiary is the decedent’s spouse, the spouse has special options for a lifetime payout or the ability to treat the plan as their own plan and defer distributions until they reach the age when distributions are required to begin*. Prior to the passage of the SECURE Act (part of the Appropriations Act noted above), individuals had complicated options that included, in some cases, being allowed to stretch the taxable distributions from a retirement plan or inherited IRA over their lifetimes. With the passage of the SECURE Act, and for distributions from retirement plans or IRAs of individuals dying in 2020 or later, the ability for some beneficiaries to stretch the distributions has been rescinded and replaced with a requirement to withdraw all the funds by the end of a 10-year period beginning the year after the plan owner’s death. This will no doubt require some tax planning to mitigate the taxes on the distribution. Should the account’s heir wait until the end of the 10 years to withdraw the funds, take one-tenth of the account each year, or adjust annual distributions to match fluctuations of their other income? Each person’s situation is unique and will require analysis to determine what the best payout plan is for them. The SECURE Act does include the following exceptions to the 10-year distribution period:
Spouse – In the case of the surviving spouse of the decedent, the spouse continues to have the options to treat the plan as if it were theirs and defer distributions until the surviving spouse reaches the required distribution age*, take distributions over their lifetime, or take the distributions within 10 years of the decedent’s date of death. Minor Child – If a minor child is the beneficiary of the deceased’s retirement plan or IRA, the entire account must be distributed within 10 years after the year the child reaches the age of majority. In the U.S., the age at which a child reaches majority (i.e., is considered an adult) is determined by each state, with age 18 being the most common age. Individual Fewer than 10 Years Younger, Disabled or Chronically Ill – For any individual beneficiary who is not more than 10 years younger than the deceased (for example, a sibling or a friend) or is disabled or chronically ill, the retirement plan or IRA account balance generally may be distributed (similarly to pre-Act law) over the life expectancy of the beneficiary, beginning in the year following the year of death of the deceased retirement plan or IRA owner.
The issue of naming a trust as the beneficiary of an IRA comes up regularly. There is no tax advantage to naming a trust as an IRA beneficiary. Of course, there may be a non-tax-related reason, such as controlling a beneficiary’s access to money; naming a trust rather than an individual(s) as the beneficiary of an IRA could achieve that goal. Generally, trusts are drafted so that required distributions from the IRA will pass through the trust directly to the individual trust beneficiary and, therefore, be taxed at the beneficiary’s income tax rate. However, if the trust does not permit distribution to the beneficiary, then the distributions will be taxed at the trust level, which has a rate of 37% on any taxable income in excess of $12,750 (2019 rate). This high tax rate applies at a much lower income level than for individuals. If you have a trust set up to receive IRA distributions, you should consider having your legal advisor review this arrangement in light of the recent law changes. To ensure that your IRA will pass to your chosen beneficiary or beneficiaries, be certain that the beneficiary form on file with the custodian of your IRA reflects your current wishes. These forms allow you to designate both primary and alternate individual beneficiaries. If there is no beneficiary form on file, the custodian’s default policy will dictate whether the IRA will go first to a living person or to your estate. It may be appropriate to consult with this office regarding your particular circumstances before naming beneficiaries; also, call if you have questions about the new inherited IRA and retirement plan distribution rules. *Effective for tax year 2020, for living IRA and retirement plan owners, the age for required minimum distributions increases from age 70½ to age 72, but only for taxpayers who turn 70½ after December 31, 2019.

Are You Following Best Practices in QuickBooks Online?

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Habits can be good things when you’re talking about getting through the workday successfully. You might have developed a habit of responding to emails quickly and preparing checklists before you go into meetings. Maybe you schedule your most challenging work for high-energy times of the day and leave less-demanding tasks for those times when you’re not as chipper. It’s easy to fall into habits with QuickBooks Online, too. You might follow the same workflow pattern every day simply because that’s the way you’ve always done things. There’s nothing wrong with that – as long as you’re incorporating as many of the site’s best practices as you can. That is, you’ve made a habit of taking actions that will lead to the most effective use of QuickBooks Online. Here are four habits we think you should consider developing if you haven’t already. Go through your new transactions every day: One of the five best things about QuickBooks Online is its ability to connect to your financial accounts and import transactions regularly. But this feature is only useful if you review your recently-downloaded transactions every day. Wait too much longer than that, and it will become too overwhelming.
We recommend you review your account transactions every day and complete any of the fields necessary.
To view an account register, you’d click Banking in the left vertical pane, and then click on the desired account at the top of the screen. When you select a transaction, a small window like the (partial) one pictured above drops down and displays your options. If you have not worked with defining and clearing downloaded transactions before, we can provide guidance here. It’s complicated. Always assign categories to expenses: You’ll get out of QuickBooks Online what you put into it. That is, the more conscientious you are about completing records and transactions thoroughly, the more helpful your reports will be. It’s especially important that you assign categories to expenses and mark them as billable or not. Those categorized expenses will be very important as you’re preparing your company’s income taxes. And you want to be sure that customers are billed for expenses you incur on their behalf. Run aging reports once or twice a week: QuickBooks Online can help you keep up with money owed to you and money you owe, but you have to take the time to stay current with that information. The site’s Dashboard provides the dollar total for unpaid invoices and links to a list, but it doesn’t tell you what bills of your own may be coming due – or are late. We recommend you run at least two reports at the beginning and end of the week: Accounts Receivable Aging Summary and Accounts Payable Aging Summary. You can modify these reports by clicking the Customize button, but they should be good as is. You don’t want to see any numbers in any columns except the first one (Current). If you see any beyond that, it means that either incoming or outgoing payments are overdue. Click on any number to see the transactions behind it. Set reorder points on inventory items.
Inventory-tracking in QuickBooks Online is complicated. We can help you understand it.
Keep an eagle eye on your product inventory levels. When you create an item record (Sales | Products and Services | New), be sure to enter a Reorder point. The Products and Services page tells you how many items have Low Stock or are Out of Stock. You can also see the Qty on Hand and Reorder Point in the table below those numbers. Warning: Inventory-tracking is an advanced feature of QuickBooks Online. If you need these tools, contact us about scheduling some time to go over them thoroughly. More to Implement There are many other best practices that we’d recommend for your use of QuickBooks Online. Several of them have to do with reports, one of the site’s capabilities that is particularly robust but which many businesses don’t fully engage in because some of them are difficult to analyze. These include standard financial reports like Balance Sheet and Statement of Cash Flows. You’ll need these reports if you apply for financing or want to share information about your company’s financial health with a third party. The insight they provide can also be useful to you in making business decisions. We’d be happy to create and analyze these for you on a regular basis, or to consult with you on any other aspect of QuickBooks Online that is perplexing.

Congress Extends Employers’ Hiring Tax Credit for Another Year

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Article Highlights:

Potential Credit
Eligible Employees
Credit Determination
Certification Process
Other Issues

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including extending certain tax provisions that expired after 2017 or were about to expire, a number of 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. Employers that hire disadvantaged individuals, such as unemployed veterans, SSI recipients, and ex-felons, among others, may benefit from a substantial federal tax credit. Hiring certain new employees can qualify the employer for the Work Opportunity Tax Credit (WOTC), which Congress extended for one additional year, so that it is now available for wages paid to eligible employees who begin work before January 1, 2021. The WOTC is typically worth (i.e., reduces the employers’ tax by) up to $2,400 for each eligible employee, but it can be worth up to $9,600 for certain veterans and up to $9,000 for “long-term family assistance recipients.” Generally, an employer is only eligible for the WOTC when paying qualified wages to members of any of the targeted groups listed below. For more details on the required qualifications for each group, see the instructions for IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).
(1) Qualified IV-A recipients – generally, members of a family that is receiving assistance under the Temporary Assistance for Needy Families (TANF) program; (2) Qualified veterans; (3) Qualified ex-felons – generally, those hired within one year of their release; (4) Designated community residents – those who are 18 through 39 years old who are living in an empowerment zone or a rural renewal area*; (5) Vocational rehabilitation referrals – handicapped individuals who are referred by rehabilitation agencies; (6) Qualified summer youth employees – those who are 16 or 17 years old, have never previously worked for the employer, and reside in an empowerment zone*; (7) Qualified members of families who participate in the Supplemental Nutritional Assistance Program (SNAP); (8) Qualified Supplemental Security Income recipients; (9) Qualified long-term family assistance recipients – those receiving TANF assistance payments; and (10) Qualified long-term-unemployed individuals. * Both empowerment zones and rural renewal areas are listed in IRS Form 8850’s instructions.
For an employer to qualify for the credit, the employee must work at least 120 hours in the first year and receive at least 50% of his or her wages from that employer for working in the employer’s trade or business. Relatives of the employer as well as employees who have previously worked for the employer do not qualify for the credit. For most employees from the targeted groups, the credit is based on the first $6,000 of first-year wages. If an employee completes at least 120 hours but less than 400 hours of service for the employer, the credit is equal to those wages multiplied by 25%. If the employee completes 400 or more hours of service, the credit is equal to the employee’s wages multiplied by 40%. Thus, the maximum credit per employee in one of these groups would be $2,400 (.4 x $6,000). For summer youth employees, only the first $3,000 of first-year wages counts, resulting in a maximum per-employee credit of $1,200 (.4 x $3,000) Higher first-year wages are used when calculating the credit for employees in the following categories:

Long-term family assistance recipients – For an employee in this category, the first-year wages that can be taken into account for the credit are increased to $10,000. This would result in a maximum credit of $4,000 (.4 x $10,000). In addition, employees in this group qualify the employer for a credit in their second year (immediately following the first year) equal to 50% of second-year wages, up to $10,000.
Veterans – The three possible qualifications for veterans have applicable first-year wages for the credit of up to $12,000, $14,000, and $24,000. Thus, the maximum credit for this group is between $4,800 (.4 x $12,000) and $9,600 (.4 x $24,000), depending upon the qualification.

Certification Process – To be eligible to claim the WOTC, the employer must file Form 8850 with its state workforce agency no later than 28 days after an eligible employee begins work. Once the worker is state-certified as a member of a targeted group and has worked sufficient hours, the employer can claim the WOTC on Form 5884 (Work Opportunity Credit). Other Issues:

No Dual Benefits – The employer may not claim a deduction for the portion of wages equal to the WOTC for that tax year.
Unused Current-Year Credit – The credit is included in the general business credit. If an employer’s credit is greater than its income-tax liability (including the alternative minimum tax), the excess credit is considered an unused credit that is available for use on another year’s return. The unused credit is first carried back one year (generally by amending the return for the carryback year) and then carried forward until any remaining credit is used up (but for no more than 20 years).

In some circumstances, electing not to claim the credit will be more beneficial for the employer. If you are an employer and would like additional information related to the WOTC and to see if it would be beneficial in your particular tax circumstances, please call this office.

Posted in Tax

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

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Your taxes contain an array of sensitive information, from financial data to your Social Security number or tax ID number. Because of this, there are many scams that unsavory characters attempt to perpetrate by impersonating the IRS or another tax authority. It can be difficult 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 needs. There are many situations where the IRS is simply sending you a notice, and you may not have to do anything. However, if the IRS is requesting additional information, it is important 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 will be able to 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 get in touch with your tax professional to determine the legitimacy of the IRS contact 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 literally millions of letters to taxpayers every year for various reasons. In most cases, the letters do not deal with audits. In fact, 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 letter 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; 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. Remember: contact our office right away so we can put our tax and IRS expertise to work ensuring the contact you’ve received is legitimate.

Posted in Tax

Congress Adds More Uses for College Savings Plans (Sec 529 Plans)

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Article Highlights:

Benefits of College Savings Plans
Contributions
Plan Modifications
Tax Cuts & Jobs Act
Appropriation Act of 2020
Prudence in Using the Funds
Gift Tax Twist

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including extending certain tax provisions that expired after 2017 or were about to expire, 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 dealing with those changes and how they may affect you. Congress originally created the Qualified State Tuition Plan, often referred to as the Sec 529 Plan, as a tax-beneficial incentive for parents, grandparents, and others to save money for an individual’s future college tuition and fees. There is no federal tax deduction for making contributions, but taxes on the earnings within a plan are not only tax-deferred while they are held in the account, they are tax-free when withdrawn to pay for qualified education expenses. Thus, the real tax benefit of these plans is the earnings within the plan accumulating tax-deferred and then being tax-free when withdrawn if used for college tuition and related qualified expenses. Contributions – To maximize the tax benefits of a plan, it should be established for a child as soon after birth as possible when funds are available for contribution. For tax purposes, there is no limit on the amount that can be contributed, but contributions are considered gifts and each individual contributing to a plan would have to file a gift tax return if the gift exceeds the annual inflation-adjusted gift tax exclusion, which is $15,000 for 2020. There is also a special gift provision that permits a contributor to contribute up to 5 times the annual gift tax exclusion amount to a qualified tuition account in a single year and treat the contribution as having been made ratably over the five-year period beginning with the calendar year in which the contribution is made. Thus, this provision permits front loading of contributions and accelerates the accumulation of earnings within the account. When this special provision is used, a gift tax return is required in the year of contribution, and any amount contributed that is allocable to the years within the five-year period remaining after the year of the contributor’s death are includible in the contributor’s gross estate. However, while the income and gift tax laws don’t cap how much can be contributed to a qualified tuition plan, the 529 plans do limit the maximum amount that can be contributed per beneficiary based on the projected cost of a college education, and the maximum amount will vary between plans, though most have limits in excess of $200,000, with some topping $475,000. Generally, once an account reaches that level, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow. Modifications – Since originating these plans, Congress has continued to modify the purpose of the plans by allowing plan funds to be used for more than just college tuition and fees. Over the years, they have allowed plan funds to be spent on additional expenses, including books, supplies, equipment, reasonable room and board, and computer technology. More recently, as part of the Tax Cuts & Jobs Act and beginning in 2018, the following qualified expenses were added:

Up to $10,000 of 529 plan funds to be used federally tax-free annually, per student, for elementary school and high school tuition expenses to attend public, private, and religious schools.

Now, as part of the Appropriations Act of 2020, and effective for distributions made after 2018, the eligible use of a plan’s funds will include:

Qualified higher education expenses associated with registered apprenticeship programs certified by the Secretary of Labor under Sec 1 of the National Apprenticeship Act.
Payment of education loans up to a maximum of $10,000 (reduced by the amount of distributions so treated for all prior taxable years) including those for siblings.

Be Cautious – Remember, the tax benefit of these plans is amassing tax-deferred investment income, which then can be withdrawn tax-free to pay qualified education expenses. Using these funds too early will not achieve the desired goal of accumulating and compounding investment income. Thus, you should carefully consider whether to use the funds for elementary and secondary school education expenses or to wait and tap the account for post-secondary education, with the latter choice maximizing investment income. There are also tax credits to help fund a child’s college education. For example, one favorable twist of the tax code allows a grandparent (or others) to directly pay the child’s tuition without being subject to the gift limitations or reporting. On top of that, assuming the child is a dependent of their parent, the parent may qualify for the higher education credit even though the grandparent paid the tuition. The parent’s eligibility is affected by their income, since the credits phase out once the adjusted gross income of the individual claiming the credit exceeds an amount based on filing status and the type of credit claimed. If you need assistance with long-term education planning, give this office a call.

New Twist Added to the IRA-to-Charity Provision

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Article Highlights

Qualified Charitable Distributions (QCDs)
Required Minimum Distribution
Age Limit Repealed for Traditional IRA Contributions
Coordination of QCDs and Deducted Traditional IRA Contributions

Ever since 2006, individuals age 70½ or older have been able to transfer up to $100,000 annually from their IRAs to qualified charities. These transfers are referred to as qualified charitable distributions (QCDs), and here is how this provision, if utilized, plays out on a tax return:
(1) The IRA distribution is excluded from income; (2) The distribution counts toward the taxpayer’s required minimum distribution (RMD) for the year; and (3) The distribution does NOT count as a charitable contribution.
At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer with itemized deductions lowers his or her adjusted gross income (AGI), which helps with other tax breaks (or punishments) that are pegged at AGI levels, such as for medical expenses, passive losses, and taxable Social Security income. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution. The age 70½ threshold for QCDs was originally coordinated with the age 70½ requirement to begin taking distributions from qualified employer plans and traditional IRAs known as RMDs. However, the SECURE Act (Appropriations Act of 2020), effective beginning in 2020, increased the RMD age to 72 but still allows QCDs once the taxpayer reaches age 70½. The act also repealed the age restriction for making traditional IRA contributions beginning in 2020, which means a taxpayer can make traditional IRA contributions and QCDs after reaching age 70½. As a result, Congress included a provision in the act requiring a taxpayer who qualifies to make a QCD to reduce the QCD non-taxable portion by any traditional IRA contribution that is deducted and made after reaching 70½, even if they are not in the same year.
Example #1 – Jack makes a traditional IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72. He claims an IRA deduction of $7,000 on his tax return for each year. Then later when he is 74 he makes a QCD in the amount $10,000 to his church’s building fund. Since Jack had made the IRA contributions after age 70½, his QCD must be reduced, but not below zero, by the post-70½ contributions that were deducted, and as a result the $10,000 is taxable. However, he can claim $10,000 to the church building fund as a charitable contribution on Schedule A if he itemizes his deductions. Example #2 – Bob makes a traditional IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72, and deducts the IRA contributions on his returns. Then later when he is 74 he makes a QCD in the amount $20,000 to his church’s building fund. Since Bob had made the deductible IRA contributions after age 70½, for tax reporting his QCD must be reduced by the $14,000. As a result, of the $20,000 QCD, $14,000 is a taxable distribution, $6,000 is nontaxable and Bob can claim a $14,000 charitable contribution.
If you think that this tax provision may affect you and you have questions, please call this office. If you missed any of the earlier tax law change articles you can view those articles at the links below:

Congress Allowing Higher Medical Deductions for 2019 and 2020
Employer’s Pension Startup Credit Substantially Increased
Above-the-Line Education Tax Deduction Reinstated
Mortgage Insurance Premium Deduction Retroactively Extended
The Home Energy Saving Tax Credit Is Back
Did You Pay Tax on Home Mortgage Debt Relief in 2018
New Twist for Kiddie Tax with a Refund Opportunity
Childbirth and Adoption Penalty Exception Add
Congress Removes IRA Contribution Age Restriction

March 2020 Individual Due Dates

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March 10 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. March 16 – Time to Call for Your Tax Appointment It is only one month until the April due date for your individual income tax returns. If you have not made an appointment to have your taxes prepared, we encourage you to do so before it becomes too late. Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us. Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you. We look forward to hearing from you.

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March 2020 Business Due Dates

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March 2 – Farmers and Fishermen File your 2019 income tax return (Form 1040 or 1040-SR) and pay any tax due. However, you have until April 15 to file if you paid your 2019 estimated tax by January 15, 2020. March 2 – Large Food and Beverage Establishment Employers File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31. March 2 – Applicable Large Employers (ALE) & Self-Insuring Employers Provide employees with annual information statement of health insurance coverage, Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. This date reflects an automatic 30-day extension from the statutory due date of January 31 provided by the IRS (Notice 2019-63). This extended due date also applies to insurers who are required to provide Form 1095-B, Health Coverage, to individuals. The government’s copies of these forms were due February 28 (or March 31 if filed electronically). March 16 – Partnerships File a 2019 calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. If you want an automatic 6-month extension of time to file the return and provide Schedules K-1 or substitute Schedules K-1 to the partners, file Form 7004. Then, file Form 1065 and provide the K-1s to the partners by September 15. March 16 – S-Corporations File a 2019 calendar year income tax return (Form 1120-S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120-S), Shareholder’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1 (Form 1120-S). To request an automatic 6-month extension of time to file the return, file Form 7004 and pay the tax estimated to be owed. Then file the return; pay any tax, interest, and penalties due; and provide each shareholder with a copy of their Schedule K-1 (Form 1120-S) by September 15. March 16 – S-Corporation Election File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2020. If Form 2553 is filed late, S treatment will begin with calendar year 2021. March 16 – Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in February. March 16 – Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in February. March 31 – Electronic Filing of Forms 1098, 1099 and W-2G If you file Forms 1098, 1099 (other than 1099-MISC with an amount in box 7), or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, January 31 or February 28 was the due date, depending on the form filed. The due date for giving the recipient these forms was January 31. March 31 – Applicable Large Employers (ALE) – Form 1095-C If filing electronically, file Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, with the IRS. If filing on paper the due date was February 28, 2020. March 31 – Large Food and Beverage Establishment Employers If you file Forms 8027 for 2019 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, February 28 was the due date.