According to a recent report released by the Treasury Inspector General for Tax Administration (TIGTA), the Internal Revenue Service decided to destroy an estimated 30 million paper-filed information return documents in March 2021 because of its inability to process its backlog of paper tax returns. The IRS typically uses information return documents for post-processing compliance matches to identify taxpayers who do not accurately report their income. During the pandemic, millions of paper tax returns and other documents accumulated at IRS facilities, and the agency has been working overtime to catch up on the backlog.

During a Senate oversight hearing at the start of May, IRS Commissioner Chuck Rettig testified that the number of unprocessed tax returns from 2021, as of April 21, had been reduced to 1.8 million from the 16.4 million at the end of 2021. The IRS receives large volumes of paper-filed tax and information returns, leading to high processing costs every year. In the fiscal year 2020, the IRS spent more than $226 million on processing paper-filed tax returns. The report acknowledged that the IRS has taken several actions and developed initiatives to increase e-filing. On top of that, legislative requirements have resulted and will continue to increase e-filing. 

The report noted that the IRS does not have a Service-wide strategy that identifies, prioritizes, and provides a timeline for adding tax forms for e-filing nor an accurate and comprehensive list of tax forms not available to e-file. Without a proper strategy and a list of forms not available for e-file, individuals will be unsure of e-filing, thus deciding to paper file and creating an even more significant backlog. These issues led to the wholesale destruction of millions of information returns as a part of an effort to expedite the processing of the backlogged business tax returns. The documents help the IRS’s Automated Underreporter Program identify taxpayers who are not accurately reporting their income. Still, IRS officials told TIGTA that once the tax year ends, the information returns, such as Forms 1099-MISC, Miscellaneous Information, can no longer be processed due to system limitations. That is because the system used to process the information returns is taken offline for programming updates in preparation for the following filing season.

The TIGTA recommended that the IRS develops a Service-wide strategy to prioritize and incorporate all forms for e-filing; develop processes and procedures to identify and address potentially non-compliant corporate filers; and develop processes and procedures to ensure that penalties are consistently assessed against business filers that are non-compliant with e-filing requirements. The IRS agreed with the first recommendation to establish a Service-wide strategy to incorporate all forms for e-filing but did not agree with the report’s other two recommendations. IRS officials said they did not need to develop processes and procedures to identify non-compliant corporate filers because all requirements to assess penalties are unknown at the filing time. The IRS also has systemic processes in place for e-filed partnership returns, which were found to be working as intended. Other types of business returns have differing criteria for e-filing requirements and exceptions to the requirements, which prevent the implementation of a standard process for all business filers. 

TIGTA believes that IRS management’s justification for taking no action on two recommendations is insufficient. “In view of the backlogs of paper tax returns, the IRS should take additional steps in an effort to continue to reduce paper return filings,” said the report. The IRS pointed out that it is facing a tight budget but continues to pursue more ways to spur the e-filing of various types of business tax returns.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

One well-heeled couple in Florida, who own a private real estate development business, are passing on hundreds of millions in wealth to their two daughters free of gift and estate taxes. Their method: shuffling buildings, stocks, and other investments through more than two dozen short-term trusts. They use grantor-retained annuity trusts, which have three major tax benefits: Grantor Retained Annuity Trusts move assets out of a taxable estate, they don’t trigger any gift taxes for the donor, and they “freeze” the value of contributed assets, making their future appreciation free of the 40% gift tax and estate tax.

By setting up a GRAT so that assets can be swapped in and out, a taxpayer can extract declined stocks and substitute them with stable Treasury bills. The impacted shares are then placed into a new GRAT, restarting the two-to-three-year clock to give them time to bounce back. But even when a GRAT goes “under water” because a battered asset doesn’t bounce back, the grantor comes out ahead if the trust allows asset substitutions, which means GRATs are like a free pull at a slot machine. If the GRAT ‘hits,’ assets are transferred to the beneficiaries free of gift tax. If it doesn’t, the grantor is in the same tax situation as before the GRAT was executed. Advisors see the recent market drop as an attractive opportunity to play those odds and avoid estate taxes. Taxpayers don’t pay that levy until their estates reach just over $24 million for married couples, half that for single persons. The levels are set to revert to half those amounts come 2026.

Once a taxpayer puts stocks, bonds, or stakes in funds or businesses into a GRAT they control, the vehicle pays them a yearly annuity, calculated as slightly more than the contributed property or cash value. At the end of the trust’s life, typically two or three years, whatever is left over goes to the trust’s heirs free of gift tax. The donor, known as the grantor, doesn’t owe gift tax because they retain control of the trust during its lifetime and thus doesn’t owe that levy on transfers to themself. The annual payments back to the grantor have to clear what the IRS calls its 7520 hurdle, which is 3% for May 2022. The trick is to put in an asset whose value is expected to boom, like property or stock in a startup, or has declined but is expected to pop back, like shares in Amazon. This is because it’s easy to outpace the low interest rate hurdle, and the excess gains eventually pass to heirs tax free. When the total payments back to the grantor equal the original value of what was put into the trust — even though that number has subsequently swelled — the vehicle is called a “zeroed-out GRAT.” 

Since its inception in 1990, GRATs have been periodically attacked by Democratic lawmakers as an unfair loophole that allows the ultra-affluent to funnel tax-free wealth to the next generation. President Joe Biden’s federal budget proposal in March revives some of the curbs, including forcing trust owners to pay capital gains tax on unrealized appreciation when the trust goes to beneficiaries and requiring it to hold at least $500,000 or 25% of the value of assets contributed, whichever is greater. That latter amount would be taxable. Biden would also require GRATS to have a minimum life of 10 years and end their tax-free asset swaps. While there would be exceptions for heirs who are spouses, those recipients would owe capital gains tax when they die or sell a GRAT’s assets. Many financial advisors are skeptical that Biden’s proposed curb will win approval.

Though your options are virtually limitless, proper estate planning, deciding on the “who, what, when, and how”, and executing this with the least amount paid in taxes, legal fees and court costs can be a challenging and emotional affair to wrestle with alone. For more information, contact Talley LLP today. 

On April 22, 2022, Governor Ron DeSantis signed legislation to end a special municipal district Disney has operated in the state since the late 1960s. It is part of a plan to punish the company for speaking out against a law, championed by the governor, that bans discussion of sexual orientation or gender identity in kindergarten to third-grade classrooms. But for now, at least, DeSantis is leaving alone another valuable perk: $578 million in credits Disney can use to reduce its state income taxes through 2040. A spokesperson for the governor said that DeSantis has not asked the legislature to repeal the tax credits because it is not a carve-out for a specific corporation. Any company can apply for the incentives, and the more significant investments will qualify for the bigger tax credits.

Florida economic development officials certified the credits in February 2020. In its application for the incentives, Disney cited plans to move as many as 2,000 staffers, making an average of $120,000 a year, to a new corporate campus in the state. One of the state’s largest employers because of its theme parks there, the company is investing $864 million in the relocation, including office construction, supplies, and software improvements. Disney considered other states, including California, New York and Connecticut. In its application, the company said that the incentives were an integral part of the overall decision to determine this project’s location. DeSantis has been at war with Disney since employees pressured the company to speak up about the school bill in early March. The governor has also said he regrets signing 2021 legislation that exempted Disney from a bill preventing social media companies from banning candidates from their platforms. Lawmakers removed the exemption in the special session in April 2022. The legislation signed Friday calls for dissolving Disney’s Reedy Creek Improvement District. Still, it leaves some crucial questions unanswered, like what will happen to the $1 billion in bonds backed by the district and who would take care of the services the company currently provides?

Who pays? If the district is dissolved, Florida taxpayers will likely bear the cost. Orange and Osceola counties will probably assume title to all municipal property and debt of the district, which provides power, water, and other services to the Walt Disney World resort complex. At a signing event for the bills on Friday, DeSantis said residents should not be concerned about the services provided by the improvement district. In an interview, Anna Eskamani, a Florida representative, noted that not every business can qualify for the tax credits Florida offered Disney because they have high investment and job creation requirements. The governor could ask the legislature to consider repealing them if he wanted.

Florida’s risk. Challenging the tax credits could lead Disney to abandon plans to move the 2,000 workers to the state. The relocation has been controversial at the company, with many park designers presently in California preferring not to pack up and go to Florida. The issue has been one of the underlying elements fanning the internal opposition to the Florida schools bill, with a website created by employees explicitly asking the company to halt the move.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

The high court issued an order on Monday, April 18, 2022, denying the request from New York, New Jersey, Maryland, and Connecticut to review a decision of the U.S. Court of Appeals for the Second Circuit regarding the SALT deduction cap. The appeals court rejected several state legal arguments against the cap, including that it unconstitutionally coerces the states to abandon their preferred fiscal policies. The cap generally blocks taxpayers who itemize federal deductions from deducting more than $10,000 per year for paid state and local taxes, including property taxes and either income or sales taxes.

The states argued that the cap unconstitutionally interferes with their sovereign authority to levy and collect property and income taxes. The Second Circuit rejected their arguments, finding that neither Article I of the Constitution nor the 16th Amendment bars Congress from curtailing the SALT deduction, even if citizens in certain states will pay billions of dollars in additional federal taxes. The appeals court ruled that such injuries are not significant enough to be coercive under the Tenth Amendment. Joe Bishop-Henchman, vice president of tax policy and litigation at the National Taxpayers Union Foundation, noted the states’ petition was meritless. Nothing about a deduction for the 12% who still itemize is constitutionally mandated. While it is true that high taxes can harm competitiveness, New York should solve the problem in Albany instead of in the federal courts.

When the SALT cap was enacted, there was no serious debate over its constitutionality. This did not stop several high-cost states that claimed to be targeted by the cap from challenging it. With their best chance, the Second Circuit rejected, the states decided to take it a step further and go to the Supreme Court, hoping the outcome would be different.

The Monday order leaves the cap in place. U.S. Rep. Bill Pascrell of New Jersey commented that his state’s delegation remains united to enact SALT reform through Congress this year. Pascrell and other law-makers have vowed to oppose any White House tax proposals that do not raise the $10,000 cap. Pascrell believes that critics of their push on SALT operate on incorrect assumptions. Law-makers like Pascrell say that SALT is not only about providing tax relief to the middle class, but it is about supporting their communities. New Jersey cities and towns directly rely on SALT to finance police, road-building, and public transit. A restored SALT cap would help provide the necessities communities rely on daily. Fellow New Jersey Rep. Josh Gottheimer slammed the deduction cap and urged the Senate to approve legislation raising it. Last year, the Build Back Better Act passed by the House included a cap increased to $80,000, but the Senate has not taken up the bill, which has effectively been declared dead. 

More than 20 states have enacted workarounds similar to those enacted on April 7 2022 in New York. The $220 billion New York law included adjusting state and local tax laws affecting the cap. The move allows more state residents to get the full benefit of a state workaround to the cap that gave partnerships, LLCs and S corporations an avenue to ease the cap’s impact on individuals’ federal deductions for paid state and local taxes. 

New York, New Jersey, and Connecticut have also sued, challenging Treasury Department regulations blocking a form of state SALT cap workarounds. The efforts involve tax credits offsetting many donations to state and local charitable funds. The rules blocked federal deductions for donations.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

Today, the biggest challenge with accounting data analytics is how quickly the sheer amount of data available can become overwhelming. As the utilization of data in accounting continues to grow, it becomes a challenge to determine which data is relevant and essential to make more informed decisions. How do you find and separate the relevant data? You need to know your audience and what you’re trying to accomplish and utilize technology to prevent information overload.

Identify Your Audience: While the data does not change, the story that it tells may vary from person to person. Different stakeholders may have very different questions. Knowing who will be asking these questions is just as important as the question itself. Considering time and billing data, staff and seniors would be interested in how they compare to their peers, such as details about where they are exceeding expectations or falling behind. However, managers will not want quite that level of detail, preferring a summary view that highlights only those who fall outside the first or second standard deviation.

Managers and partners may be interested in learning more about staff efficiency. They would benefit from an analysis of which staff are most effective at various types of engagements to assist with planning. If the audience is just you, it is also important to identify that. All too often, when we are the only audience, the question becomes secondary, and analysis becomes the purpose – which is not the best use of time.

Know What You Are Trying to Accomplish: To perform an effective analysis, you need to have a question, purpose, or objective. A poorly constructed question can lead to costly and time-intensive data reviews that do not accomplish anything. Before diving into the data, determine what you are trying to discover. Data analytics results will only be as good as the questions you ask. When preparing your questions, consider your audience, strategic goals, and budget. If you are struggling with understanding what questions to ask, start broad, but do not stop there. While it is often helpful to start broad, the question needs to be specific to get valuable and actionable insights. Some questions to ask yourself include:

  • What is the goal of this analysis?
  • What decision-making will it facilitate?
  • What outcome would be considered a success or a failure?


Implement Automation to Prevent Information Overload: Consider the data accounting firms and tax preparation businesses often track without thinking about it. There is internal data, from time tracking and how clients are served to practice management data such as billing, collections, business development, and client data, which is information about the client collected during the engagement process. Also, some data is a mix of the two: client and prospect interactions with internal content such as emails, webinars, websites, and social media. Technology has allowed us to collect the data listed above and so much more. Technology has also allowed us to perform our data analysis faster and on a much larger scale. But there are downsides to all advances – and for accounting data analytics, information overload is one of them.

Although technology created the problem of too much data, it can also help find the relevant data. Advanced technologies like machine learning and AI can automate the base data analysis, which gives structure to unstructured data and provides accountants with the most pertinent information. With automation sifting through the data, we can perform higher-level data analysis and understand how to shape the answer for intended audiences.

From technology-based accounting solutions to management information, analysis, and reporting, Talley LLP is the premier business consulting firm for entrepreneurs and their closely-held businesses. For more details about leveraging your business’ data technology, contact Talley today.

The Treasury Department released its “Greenbook” at the end of March after the Biden administration’s $5.8 trillion budget request for fiscal year 2023. The budget calls for over $2.5 trillion in tax hikes on the wealthy and large corporations over a decade. It includes adopting an “undertaxed profits rule,” providing tax incentives for locating jobs and business activity in the U.S. and removing tax deductions for shipping jobs overseas. The proposal would also expand the definition of a foreign business entity to include taxable units. The Greenbook details the tax proposals in the Biden administration’s budget. This included plans to raise the corporate tax rate to 28% and levy taxes on the unrealized capital gains of “extremely wealthy” individuals.

Biden’s budget aims to increase funding for the Internal Revenue Service as well. The budget provides a total of $14.1 billion for the IRS, which includes an increase of $798 million above fiscal year 2021 to improve the taxpayer experience and expand customer service outreach to underserved communities and the taxpaying public. The budget also provides $310 million for IRS business systems modernization to accelerate the development of new digital tools to enable better communication between taxpayers and the agency.

For tax preparers, the plan would expand and increase penalties for noncompliant tax return preparation and e-filing and authorize IRS oversight of paid preparers. The plan also aims to address compliance in connection with the tax responsibilities of expatriates, simplify foreign exchange gain or loss rules and exchange rate rules for individuals, and increase the threshold for simplified foreign tax credit rules and reporting. Other provisions in the Greenbook would make the New Markets Tax Credit permanent and allow selective basis boosts for bond-financed Low-Income Housing Credit projects. It contains provisions to eliminate fossil fuel tax preferences and modify oil spill liability trust fund financing and Superfund excise taxes. The budget proposal aims to modernize various tax rules, including those for digital assets. Rules would be changed for treating loans of securities as tax-free to include other asset classes and address income inclusion, provide for information reporting by certain financial institutions and digital asset brokers for purposes of exchange of information, and require reporting by certain taxpayers of foreign digital asset accounts. In addition, the plan would amend the mark-to-market rules for dealers and traders to include digital assets.

A minimum income tax would require prepayment of taxes on unrealized capital gains so that liquid taxpayers would be taxed at a rate of at least 20% on their income, including unrealized capital gains for extremely wealthy taxpayers. Several tax breaks used by high-income taxpayers to avoid income, estate, and gift taxation would be closed, including the carried interest preference and the like-kind exchange real estate preference, which would be eliminated for those with the highest incomes. As for families and students, the proposals would make the adoption tax credit refundable, allow certain guardianship arrangements to qualify, and provide income exclusion for student debt relief. 

The proposals would also modify income, estate, and gift tax rules for certain grantor trusts as well as require consistent valuation of promissory notes. The proposals would change tax administration for trusts and decedents’ estates, including limiting the duration of Generation-Skipping Transfer Tax exemption. Other items in the budget proposal seek to close tax breaks by:

  • Taxing carried interests as ordinary income;
  • Repealing the deferral of gain from like-kind exchanges;
  • Requiring 100% recapture of depreciation deductions as ordinary income for certain depreciable real property;
  • Limiting a partner’s deduction in certain syndicated conservation easement transactions;
  • Restricting the use of donor-advised funds to avoid private foundation payout requirements; and,
  • Extending the period for assessment of tax for certain qualified opportunity fund investors.

The proposals would establish an untaxed income account regime for certain small insurance companies, expand pro rata interest expense disallowance for business-owned life insurance, correct drafting errors in the taxation of insurance companies under the Tax Cuts and Jobs Act of 2017, and define the term “ultimate purchaser” for purposes of diesel fuel exportation.

Other proposals in the plan aim to improve tax administration and compliance by enhancing the accuracy of tax information, addressing taxpayer noncompliance with listed transactions, and amending the centralized partnership audit regime to allow the carryover of a reduction in tax that exceeds a partner’s tax liability. The plan would authorize limited sharing of business tax return information to measure the economy more accurately, impose an affirmative requirement to disclose a position contrary to a regulation, and require employers to withhold tax on failed nonqualified deferred compensation plans. The proposals would extend the statute of limitations for certain tax assessments to six years.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

President Joe Biden’s federal budget, released on March 28, revives earlier plans to end tax-free wealth transfers to heirs and collect tax on investors’ paper profits. The budget for the government’s next year also calls for closing a longstanding loophole in which people who inherit stocks, property, or businesses, do not owe tax on the paper profits piled up since the original owner acquired the assets. The Biden administration suggested $2.5 trillion in tax hikes on top of $1.5 trillion in tax increases embedded in a stalled version of the Build Back Better bill. Below are some changes that wealthy investors and financial advisors should note. 

Billionaire Minimum Income Tax: The proposed Billionaire Minimum Income Tax would require ultra-rich people, centi-millionaires, and billionaires, to pay at least 20% in taxes on their income and unrealized gains. This tax would hit about 20,000 affluent American households and raise $361 billion over ten years, which lays out the administration’s proposed spending and tax increases. Top earners who pay less would owe the difference up to 20%. Taxing profits that exist on paper, not as cash in a bank account, first appeared last year in various proposals from Biden and lawmakers in both chambers. The calls failed. Under current Step-up in Basis rules, an individual who inherits an asset that swelled in value in prior years does not have to pay income tax on the increase, which is unfair, according to the Treasury. This is due to less-wealthy people who have to spend their savings during retirement to pay income tax on their realized capital gains. 

Increased Income Tax Rate: Biden proposes a new top ordinary income tax rate of 39.6%, up from 37%. The new top rate would start in 2023 and apply to married couples earning more than $450,000 and single filers making more than $400,000. As of 2022, the current top 37% rate is paid by married couples making more than $647,850 and individuals making more than $539,900. The 2.6% increase would raise about $187 billion over a decade.

Increased Capital Gains Tax: Currently, capital gains are taxed at 23.8%, including the Obamacare levy. However, the proposal outlines that long-term capital gains and qualified dividends for people earning more than $1 million would be taxed at a new top ordinary rate of 39.3%, with an additional plus 3.8% for the Affordable Care Act. Any unrealized gains would be taxed when an owner dies.

Estate and Gift Taxes and Trusts:

Grantor trusts, the engine of wealth transfers to heirs, were on the chopping block last fall. This is due to an early adaptation of the Build Back Better bill, which treated future sales between trusts and their owners as a taxable sale. Biden’s budget proposes to modify income, estate, and gift tax rules for certain grantor trusts and would be effective starting January 2023. The changes would raise about $42 billion. Under the budget:

  • Donors would recognize a capital gain when transferring an asset to an heir. The paper profit would consist of the amount of appreciation in the asset since it was originally acquired.
  • A donor could exclude, or not owe tax on, $5 million of unrealized capital gains on property transferred by gift or owned at death. Portions of the $5 million exclusion that are not used during a donor’s lifetime would carry over to a surviving spouse.
  • The $5 million exclusion is in addition to the lifetime exclusion, now just over $12 million; $24 million for couples.
  • The rule would affect “certain property” owned by trusts, partnerships, and other non-corporate entities.
  • Taxpayers could choose not to recognize unrealized appreciation of a family-owned and -operated business until the business is sold or passes out of the family’s hands. They would have 15 years to pay tax on appreciated assets transferred at death. With a deferral, taxpayers would have to put up “security” to the IRS if asked.
  • If a trust, partnership, or other non-corporate entity has not recognized a gain on its assets since 1939, it would be forced to do so come 2030.
  • The rules for grantor retained annuity trusts, or GRATs, get tighter. They would be required to have a minimum value for gift tax purposes of at least 25 percent of the value of the assets transferred to the GRAT or $500,000, whichever is bigger. 
  • A trust would be banned from swapping assets without recognizing gain or loss. The trusts would last a minimum of 10 years and a maximum of 10 years plus the owner’s life expectancy.

Private Equity and Hedge Funds: In the proposal, carried interest profits would be taxed at ordinary rates instead of lower capital gains rates.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

Lawmakers are asking the Internal Revenue Service to expedite the processing of Employee Retention Tax Credits and not to penalize small businesses for incorrectly paying their estimated quarterly taxes as they await their claims. During a hearing before the House Ways and Means Oversight Subcommittee, Congress and IRS Commissioner Charles Rettig talked about the tax credits. While the ERTC was cut short in the fourth quarter of 2021, many small businesses and nonprofits are still waiting on relief from the third, second, and first quarters of 2021 while processing was delayed eight to ten months. As it was designated to be emergency relief, receiving the advance payment of this credit could mean life or death for many small businesses and nonprofits. This was due to the IRS not being able to automate the processing. Congress pressed Rettig on publicly committing to expedite the ERTC processing.

Rettig discussed his background in being sympathetic to small businesses and noted that many of them previously didn’t face the challenges that the pandemic presented to them when they needed to turn to the IRS for help. In this discussion, Congress pointed out the delays at the IRS were hurting small businesses. They asked for the number of claims the IRS processed from the previous quarter’s amendments before Q4 2021 and how many have been processed since that time. Rettig noted that Congress itself cut short the ERTC. 

The main issue companies are faced with now is the amended quarterly tax return, Form 941. Companies are filing their 941 on time and then filing the amended 941 because payroll companies don’t have the bandwidth to get the information needed in time for the 941 filing. In these cases, companies will be filing their April 2022 returns with reduced wages, but they still have not received the checks for the ERTC credit. Ultimately what this means is taxpayers are paying tax on income they have never received. Not only are small businesses liable for the tax on reduced wages, but they’re also liable for the safe harbor on their estimated taxes, which is inflated due to the reduced wages. 

Changes with R&D tax credits and expenses

There are now changes with the IRS processing R&D tax credits, asking for more documentation now to back up the claims for refunds. Now, there’s a 30-day grace period for the first year while it’s being implemented. Taxpayers are going to get one shot at making valid refund claims for R&D purposes, and there’s a list of requirements that needs to go along with the application. This is to ensure that the IRS isn’t overburdened with refund requests which they cannot audit, or with applicants that don’t qualify. However, this also increases the burden on the taxpayers since they have to get all that documentation together from the beginning. 

Another recent legislative change involves the amortization of R&D expenses after a provision in the Tax Cuts and Jobs Act of 2017 took effect this year. While this change doesn’t affect those who are filing for R&D, this is one of the biggest changes to the R&D itself. Starting this year U.S. companies lost the ability to immediately write off the full value of their investments in R&D. This has caused companies to plan for alternative decision making. While there was some hope that the omnibus spending bill that Congress passed would restore the tax break or at least further delay the TCJA provision from taking effect, it wasn’t included.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

For homebuyers searching the housing market, acquiring a mountain lodge in Colorado or a waterfront mansion in Florida would seem to translate into a bigger mortgage and smaller tax savings. This is due to housing prices skyrocketing nationwide. However, the increase does not produce a lower tax bill because the IRS limits the mortgage interest deduction of all debt on a primary residence and vacation home. Furthermore, as property prices soar, some financial advisors and wealth managers with ultra-affluent clients are using an insider technique to maximize the tax savings of buying a new forever home or dream vacation getaway. This technique makes unconventional use of another type of deduction, for interest paid on money that is borrowed and then invested in stocks or other taxable assets.

Tax-aware borrowing. The investment interest expense deduction can be more generous than the one for mortgage interest. An investor who takes out a loan to invest in stocks and has other profitable investments that are not tied to the loan can potentially deduct the loan’s entire interest. High net worth investors often generate the deduction when they take out margin loans at a brokerage, borrowing money to buy stocks or other investments. It is a little-known way of using mortgages to access cheap capital and generate tax deductions well above those enjoyed by ordinary homebuyers of middling income. 

Works best for the really affluent. Say an investor wants to buy a $10 million home. If they make a traditional move by putting down $6 million and taking out a mortgage for the remaining $4 million they will only be able to deduct up to $750,000 interest each year. Instead, our rich investor could decide to ditch a traditional mortgage and cash in on $4 million of their portfolio investments. By selling unsuccessful stocks whose losses offset the 23.8% capital gains levy due on winning shares, they will owe no tax on the sale. They would use that cash, along with their $6 million down payment, to buy the $10 million house. Next, they would take out a $4 million mortgage at 3.5% on the house and opt for the loan not to be secured by the property. Now, they can invest that borrowed money in stocks or other taxable securities. This makes the interest on the loan an investment interest-expense deduction. Essentially, the investor has swapped an interest deduction capped at $750,000 of a much larger mortgage to a deduction on the full interest on a $4 million loan. 

It is important to note that investment income that qualifies for the interest deduction on borrowed money includes bank interest, dividends taxed at ordinary rates, and annuity income. However, it does not include so-called qualified dividends, such as paid in company stock under an incentive compensation plan, or long-term capital gains. Very rich investors often have a hefty mix of both kinds of investment income. If you do not have enough “qualified” investment income to use the full loan-interest deduction, you can roll forward the leftover amount indefinitely and use it to lower the taxable income on which federal taxes are owed, in turn reducing your tax bill to the IRS. This tax alchemy works for home refinancing as well.

The gray area. The IRS states that interest on home equity loans is deductible only if the proceeds are used to buy, build, or improve a primary or secondary residence. But the rule does not square firmly with separate IRS rules on the investment interest expense deduction. This gray area may create an opportunity to reduce tax bills with property.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

The Biden administration expanded the Child Tax Credit as part of the American Rescue Plan last year by offering families advance monthly payments of $250 to $300 per qualified child to reduce the rate of childhood poverty. For the 2021 tax year, the Child Tax Credit increased from $2,000 per qualifying child, to $3,600 for children aged five and under, and $3,000 for children ages six through 17. The administration had hoped to extend the expanded tax credits this year as part of the Build Back Better Act, but that massive legislative package has been stalled.

With the Build Back Better Act stalled, The Internal Revenue Service has updated its FAQ fact sheet on the Child Tax Credit and Advance Child Tax Credit. There is new information on eligibility and how to calculate the amount of the credits and payments. The IRS is advising families and tax advisors to ignore an earlier publication, Publication 972, and to refer to Schedule 8812 (Form 1040) instead. Many taxpayers are also discovering that they are receiving less of a tax refund this year than they had anticipated since half the usual amount of the Child Tax Credit was sent out in advance last year along with the expanded portion. Taxpayers and tax professionals are currently dealing with calculating how much can still be claimed, and in some cases, how much is owed to the government if there was too much of an overpayment.

Child and Dependent Care Credit

Separately, the IRS also made a push to highlight a related tax credit, the Child and Dependent Care Credit, which also expanded for 2021. Depending on their income, taxpayers can get a credit worth 50% of their qualifying child care expenses. For the tax year 2021, the maximum eligible expense for this credit is $8,000 for one qualifying person and $16,000 for two or more. However, taxpayers with an adjusted gross income of more than $438,000 are not eligible for this credit. For the Child and Dependent Care Credit, the IRS defines a qualifying person as:

  • A taxpayer’s dependent who is 12 or younger (no age limit if incapacitated) when the care is provided
  • A taxpayer’s spouse who is physically or mentally unable to care for themselves and has lived with the taxpayer for more than half the year
  • Someone who is physically or mentally unable to take care of themselves and lives with the taxpayer for six months and is either: 1. The taxpayer’s dependent or 2. Would have been the taxpayer’s dependent except for one of the following:
    • The qualifying person received a gross income of $4,300 or more
    • The qualifying person filed a joint return; or the taxpayer or spouse, if filing jointly, could be claimed as a dependent on someone else’s return.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.


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