To help pay for a raft of social spending that addresses long-standing inequality, President Joe Biden proposes doubling the capital gains tax rate for wealthy individuals to 39.6%. This would be an increase from the current base rate of 20%, which means that for those who are earning $1 million or more, coupled with the existing surtax on investment income, federal tax rates could be as high as 43.4%. The 3.8% tax on investment income that funds Obamacare would still be kept in place, causing the tax rate on returns of financial assets higher than the rate on most wage and salary income.

Biden campaigned to equalize the capital gains and income tax rates for wealthy individuals, stating that it’s unfair that many of them pay lower rates than middle-class workers. The proposal could reverse this long-standing provision of the tax code where returns on investments are lower than labor. Mid-April, White House Press Secretary Jen Psaki stated that they are still finalizing the details. This proposal is expected to be discussed as a part of the tax increases to fund social spending in the forthcoming “American Families Plan.” The White House has already rolled out plans for corporate tax hikes, which will be used to fund the $2.25 trillion infrastructure-focused “American Jobs Plan.”

Biden’s proposal to equalize the tax rates for wage and capital gains income for high earners would greatly curb the favorable tax treatment on so-called carried interest, which is the cut of profits on investments taken by private equity and hedge fund managers. The plan would effectively end carried interest benefits for fund managers making more than $1 million because they wouldn’t be able to pay lower capital gains rates on their earnings. Those earning less than the million dollar mark may be able to still claim the tax break, unless Biden repeals the tax provision entirely.

The capital gains increase would raise $370 billion over a decade, according to an estimate from the Urban-Brookings Tax Policy Center based on Biden’s campaign platform. For $1 million earners in high-tax states, rates on capital gains could be above 50 percent. For New Yorkers, the combined state and federal capital gains rate could be as high as 52.22 percent. For Californians, it could be 56.7 percent. Democrats have said current capital gains rates largely help top earners who get their income through investments rather than in the form of wages, resulting in lower tax rates for wealthy people than those they employ.

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 proposed tax hikes are forecast to bring in $3.6 trillion over the next decade, the Treasury Department announced last week, a key funding source for the $4 trillion he hopes to spend remaking the American economy and social safety net.

What taxes are increasing in Biden’s plan?
While there has been some debate regarding which tax provisions will be affected, the biggest surprise in the plan is the assumption that there will be an increase in the capital gains rate which would be retroactive to April 2021. This means high net-worth individuals will be prevented from quickly selling their assets before the end of this year to avoid the hike. Although, in its current form, the retroactive tax hike on capital gains is very unlikely to get through Congress. The plan also involves increasing the top income tax rate from 37% to 39.6%. This would affect individuals who earn $452,700 a year, married couples who earn $509,300 a year, and heads of household who earn $481,000 a year. The Greenbook proposal also assumes that the capital gains increase would be effective on the date it was announced. Biden’s reasoning for this is to prevent the acceleration of gains during a time where tax rates are temporarily low. While the proposal allows many of Trump’s temporary tax cuts for individuals and families to expire, this will still allow the administration to bank savings from higher tax rates snapping back into place on families who make less than $400,000 a year, which he has vowed to not let happen. Many of the other tax increases are projected to be put into effect on January 1, 2022.

The Greenbook proposal also includes key tax-credit proposals that many Democratic lawmakers see as a crucial component to campaign on during the 2022 midterm elections. Some proposals include, but are not limited to, an expanded child tax credit through 2025 and benefits for green energy and electric vehicles. Congress is unlikely to enact Biden’s tax ideas as they stand, but there are still many that are supported by the White House. This will allow Congress to develop policies and find votes as well as have both parties compromise on certain aspects of the plan.

The Treasury outline also omits a key priority for Democrats, an expansion of the state and local tax (SALT) deduction. Many lawmakers from high-tax states reported that they would be in opposition to Biden’s economic agenda unless it also included an expansion of this write-off, which is currently capped at $10,000. The Greenbook proposal goes into detail about other provisions, such as imposing taxes at death on inherited property for large gains accrued during the prior owner’s lifetime. This would prevent private-equity as well as hedge fund managers from applying the long-term capital gains tax rate to their portion of the fund’s profit, also known as carried interest, if their overall taxable income exceeds $400,000.

A representative said that the administration is willing to work with Congress on proposals to create new research and development tax incentives to replace those created under President Trump’s administration.

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.

Early this month, the U.S. Tax Court published a 271-page opinion that decided the fate of Estate of Michael Jackson v. Commissioner. In a battle between valuation experts that ended in the court discounting the IRS’s expert for committing perjury, the Court found the Jackson Estate’s valuations much more accurate than those of the IRS’s experts.

Before Michael Jackson’s untimely death in 2009, the King of Pop had fallen far from grace. Before Jackson’s death, he had stopped touring due to child sexual abuse allegations and was hemorrhaging cash. He had announced a new tour that had sold out, but no shows were held, and Jackson’s team struggled to find a sponsor for his show considering his tarnished image. In a last-ditch effort, Jackson had re-hired his advisors from his “Glory days”, but they were unable to put a plan in action since Jackson died shortly after. Jackson died deeply in debt, hadn’t made a new album, had not toured, and had not made any money from his likeness or image for years.

After Jackson’s death, his advisors took action, and were extremely successful, in both restoring the value of Jackson’s image and likeness and capitalizing on that restoration. To this day, Michael Jackson is still Forbes’ highest-earning dead celebrity. He is currently the 93rd most popular artist on Spotify, even though he passed away over 11 years ago. Based largely on the post-death success of the Estate’s managers, the IRS took issue with the valuation of three “intangible” items on the Estate Tax Return. These were Jackson’s image and likeness, the value of Jackson’s interest in Sony/ATV, which is a music publishing company, and the value of Jackson’s interest in Mijac, which owns rights from various musicians, including but not limited to Jackson.

Judge Mark Holmes made clear that the court was to focus on the nature of the estate tax as a tax on the privilege of passing on the property, not a tax on the privilege of receiving the property. With this significant decision, the court was able to discern the estate was in shambles when Jackson died, and it is only through the careful and shrewd guidance of the managers that it developed into the “estate” that the Commissioner sought to tax years later. This means that since the managers had built up Jackson’s three assets after he had passed, what the Commissioner should be taxing is the value those three assets had when Jackson was alive, which was much less than now. The court decided that Jackson’s image and likeness were valued at roughly $4.1 million. This was $1 million more than what the Estate argued in trial and about $3 million more than what the estate had reported, but this value was a shocking $400 million less than what the IRS had calculated. According to the court, the IRS included, and should not have, the “intangibleness” of likeness and image, which was already counted and agreed upon elsewhere. The IRS expert also included assets that were not foreseeable at the time of Jackson’s death. While the IRS valued Jackson’s interest in Sony/ATV at about $400 million, they did not account for Jackson squeezing it dry to the $0 that the estate managers had valued it. The court agreed with the estate managers that at Jackson’s time of death his interest in Sony/ATV was $0. Lastly, the Court decided that the “Mijac revenue” was closer to the IRS’s estimate than the estate manager’s estimate. The Court determined a value of $107 million for this asset. While the IRS wanted to add penalties to the Estate’s bill for understating the value of assets, the Tax Court ultimately rejected this premise.

Although the Tax Court’s decision significantly favors the taxpayer, there will be more cases where the value of a celebrity’s image and likeliness is in dispute in an Estate Tax Case. The IRS will learn from the mistakes that were made during this case to better prepare themselves in the future.

Though your options are virtually limitless when it comes to 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 possible can be a challenging and emotional affair to wrestle with alone. For more information, contact Talley LLP today.

President Biden intends to give the Internal Revenue Service an extra $80 billion and more authority over the next 10 years as he looks for ways to raise money to pay for his economic plan. Biden plans on using the recouped tax funds to pay for the cost of the American Families Plan. This plan is expected to cost at least $1.5 trillion, which will fund universal prekindergarten, federal paid leave, affordable childcare, free community college, as well as tax credits to fight poverty.

Biden’s plan calls for tax increases, including raising the rate that people who earn more than a million a year pay on profits earned from the sale of stocks or other assets, as well as raising the top marginal income tax rate for wealthy Americans. Biden also wants to raise the rate on income for those who earn more than a million a year from stock dividends. Officials say that with an aggressive crackdown on tax avoidance by corporations and the wealthy, the IRS could recover $700 billion over 10 years. This proposal of $80 billion for funding also increases the original IRS funding by two-thirds.

Many administrations have discussed trying to close the tax gap, which is the amount of money that taxpayers owe but is not collected each year. In early April, the head of the IRS, Charles Retting, told congress that the agency does not have the resources necessary to catch tax cheats, which cost the government about $1 trillion a year. He also says that the agency’s funding has failed to keep up with inflation. Faced with a lack of resources and budget cuts, audits to wealthy taxpayers have declined over the years. This may change soon.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on the 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.

Since the Internal Revenue Service’s systems were unable to process many quarterly payments that needed to be sent by April 15, the IRS is holding millions of tax refunds for manual processing. They are delaying about 29 million tax refunds which will be processed manually due to the complexities of recent tax laws that have been passed by Congress. COVID-19 relief packages, including the Consolidated Appropriations Act, which was passed in December, and the American Rescue Plan Act, which was passed in March, now require the IRS to send second and third rounds of payments to taxpayers as well as providing taxpayers with the maximum amount of their stimulus payments. These laws also required the IRS to consider expansions in the Earned Income Tax Credit and the Additional Child Tax Credit as well as new tax credits such as the Recovery Rebate Credit.

Some believe that the delay in refunds is largely due to the late passage of the Consolidated Appropriations Act. This means that the IRS was not able to adjust their tax forms and computer systems before the start of the filing season. Instead, the IRS had no choice than but to manually process corrections for the Recovery Rebate Credit to verify income for those who choose to use their 2019 income vs. 2020 to calculate EITC or ACTC. Unfortunately, this means that millions of returns are being processed by hand in the IRS’s Error Resolution System unit.

As of April 9, 2021, over 8 million individual 1040 or 1040-SR tax returns were being held in “suspense” status until it has been reviewed. Normally, the Error Resolution System unit processes returns as they come in, without putting them on hold. With those 8 million individual returns, there are about 5.3 million individual 2019 and 2020 paper tax returns, 4.7 million returns with processing errors or fraud identification issues, and 11 million businesses and other returns. The IRS has also experienced delays in its modernized e-file system when trying to process quarterly estimated tax payments, which were, insisted by the IRS, due by April 15th, despite the May 17 extension for individual returns.

The IRS urges taxpayers not to submit the payments a second time if they were worried the payments didn’t go through. The IRS also says that if you did re-submit, that you cancel the second payment by calling 1-888-353-4537 at least two business days before the scheduled payment date, no later than 11:59 pm Eastern Standard Time.

With the constantly changing tax laws as well as the need to send out second and third rounds of stimulus payments, the IRS has been facing an array of challenges this tax season. The computer systems are being overwhelmed as well as their call centers. Many calls are going unanswered due to how busy the IRS has become, which has made their customer service decline.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance and pass on the 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.

Yesterday, California Governor Gavin Newsom signed AB 80 into law, more than three months after it was first passed in the Assembly. This bill gives businesses who have received PPP loan assistance the power to deduct expenses on their taxes. AB 80 also includes deductibility for all Emergency Injury Disaster Loan (EIDL) forgivable loans due to the Consolidated Appropriations Act. To be eligible, businesses must have received at least a 25% reduction in gross receipts since 2019 and cannot be a publicly-traded company.

AB 80 went through several months of negotiations between Democrats and Republicans until lawmakers decided to add selected provisions from a similar bill, SB 265. The two parties compromised on the 25% reduction in gross receipts minimum and the non-publicly traded company eligibility requirements, which makes this bill bipartisan. Many lawmakers are relieved and in favor of the outcome, as well as numerous small business owners who have been frustrated and waiting for solutions. AB 80 will allow small businesses to get back on their feet as the economy recovers.

Policymakers have embraced the spirit of SB 265 and made COVID-19 relief tax-free for small businesses. Many believe that AB 80 is a huge improvement over the $150,000 deductibility cap that legislative leaders agreed upon two months ago, which would have harmed many job creators. Many believe that there is still a lot more work that needs to be done to include those who have been left out of the AB 80 since many who applied for and received pandemic relief funds need every dollar to stay open.

Talley’s professionals have spent hundreds of hours reviewing the law, regulations and SBA PPP FAQs issued on an almost daily basis and we are happy to assist you in the process. We are available to simply answer a quick question or assist in the application and/or forgiveness audit process.

Last week, a judge ruled that former National Football League wide receiver, Keyshawn Johnson, owes at least $905,000 in state income tax, penalties, and interest. Johnson tried overturning a 2017 California administrative ruling that he was a resident of California in 1996, when he graduated from the University of Southern California and was drafted by the New York Jets. In January, Johnson took his dispute to the Los Angeles County Superior Court.

Tax domicile has become a more pressing issue as states seek to generate additional revenue. The standard definition of domicile is “the place which an individual intends to be his or her permanent home and to which such individual intends to return whenever absent.” When domicile is not clear, over 28 states have created tests in order to determine if an individual is a resident, typically a days-in-and-out equation, with 183-day-presence being the most common. Most states often see domicile and residence as the same thing.

But California focuses on facts and circumstances. While an individual’s intent is considered when determining domicile, the FTB also looks at the individual’s acts and declarations.

Knowing these definitions is important in Johnson’s case. Judge Mark V. Mooney decided to back the Franchise Tax Board in last Wednesday’s ruling. This decision was based on many reasons. One of them was Johnson owning a house in the suburbs of Los Angeles, and filing a New York nonresident return in his 1996 federal return. At the time, Johnson was only able to claim a mortgage deductible by being a primary resident. This means that Johnson’s claim is inconsistent with the original filing. Mooney said that proving that Johnson rented a place in New York for four months is not enough evidence to be considered a New York residence. On the same note, Johnson previously claimed that he was a Nevada resident since he rented a room for $300 a month while also renting an apartment for his girlfriend and baby back in California. Where your spouse and children are located is one of many key factors the CA FTB considers when determining residency in California.

While fighting this battle, Johnson was also trying to abate the interest and penalties accrued. He owes about $905,000 in tax, penalties, and interest; $219,000 of which is the initial Income Tax. This was denied since Judge Mooney did not have the authority to overrule these fees. Judge Mooney also stated that he would not have felt inclined to wave these fees since Johnson could have been paying them while continuing with his dispute.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance and pass on the 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.

Several of former President Trump’s corporate tax cuts may be coming to an end if President Biden proves that he can roll back the 2017 proposal on domestic income-tax reductions as well as radically overhaul levies on profits that are earned abroad. His $2.25 trillion plan, based on infrastructure, relies on high corporate levies to pay for it. This proposal will change the tax benefits that were the core of the 2017 Tax Cuts and Jobs Act, which passed solely with Republican votes. Biden plans to increase the corporate income tax rate from 21% to 28% as well as have businesses pay more on global earnings. The administration proposes to eliminate fossil-fuel tax breaks and repeal incentives to move assets and jobs offshore.

Biden’s plan will update the matrix of carrot-and-stick incentives that were put in place in 2018. These incentives determine how many U.S. companies currently pay taxes on their foreign profits. Biden proposes a 21% global minimum tax on foreign profits to help keep income and assets local. This would be an estimated increase of 13% from what corporations currently owe on offshore earnings.

While Trump’s tax law was supposed to allow American companies to compete with other foreign companies in countries where taxes were lower and international tax regimes were permissive, it has only disappointed those who put it in place. Instead, companies only repatriated a fraction of foreign profits which were envisioned by the reform. Uncertainty about the longevity of this law had led companies to adopt a wait-and-see approach.

Many Republicans have defended Trump’s tax law, saying that by raising the federal corporate tax not only will the US rate be the highest among G-7 countries, but this would also increase the cost of investing in the country, harming the economy.

The National Economic Council Director Brian Deese predicts that Biden’s plan will stop the “race to the bottom” on corporate taxes. He also argues that Biden’s plan will be beneficial to private sector companies.

Talley’s experienced team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on the 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.

Thanks to a hotly debated pandemic tax break, the Internal Revenue Service is approving corporations to receive $14 billion in tax refunds. So far the IRS has received over 41,000 applications from businesses who are taking advantage of the provision in the March 2020 pandemic relief bill; which allowed companies to apply business losses to years in which they were not profitable. The Government Accountability Office (GAO) estimates that 1,200 companies that took advantage of the provision received a refund of more than $1 million.

This tax break, which was included in the bipartisan CARES Act, has recently come under fire from Democrats; calling for it to be repealed due to it largely aiding corporations and wealthy investors. Republicans argue that this was done so that companies can easily liquidate during the pandemic.

This is one of many updates to be rolled out of the economic relief bill that was passed more than a year ago. In its regular report to Congress, the GAO says that programs, such as the Paycheck Protection Program and Economic Injury Disaster Loan, are still suffering from fraud. The GAO also says that these programs need additional protection to help prevent improper disbursal of funds. They also say that states should provide more data to help with recouping billions in fraudulent unemployment compensations that were paid.

Although the IRS has just started issuing refunds to companies claiming the pandemic relief, there are still many more applications. Some were filed on paper, getting caught up in a mail backlog, or are tied to revised tax returns that have not been processed yet. The congressional Joint Committee on Taxation predicts that the corporate tax break will cost the government about $25.5 billion total. The committee also predicts that the tax break for non-corporate entities will total about $169.6 billion over the decade. Although the GAO’s data does not go over other business types, the GAO said it will be monitoring the refund claims for those taxpayers as well.

In 2020, Congress expanded the provisions of the Tax Code which allowed companies to carry losses back as far as 5 years. This allowed previously profitable businesses to mitigate losses as the economy faltered. Normally, the Tax Code allows business owners to tabulate net operating losses for the years they were non-profitable and use those to offset tax bills in the future when they do make money.

Talley’s experienced team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on the 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.

Initially set up a year ago, the Paycheck Protection Program was a source of relief as the pandemic paralyzed the American economy. This program has since been expanded and extended due to the ongoing situation. Last week, U.S Senate approved an extension of the small-business relief program, which has about $79 billion left to distribute. The bill passed with a 92-7 vote and was signed into law by President Biden on Tuesday this week. This is a two-month extension that will give small business owners until the end of May to apply for forgivable loans.

According to the Small Business Administration, there is still $79 billion left to be lent, even after the approval of about 3.1 million loans, starting from the beginning of this year to March 21st. Owners that spend forgiveness money on approved costs, such as worker salaries, are eligible to convert their PPP loans into grants. Many business groups and leaders urged Congress to extend the deadline so that small businesses have enough time to apply for the money.

The new round of PPP lending that opened in January was available since Congress had approved of more funds in December. Additionally, lawmakers approved an extra $7.25 billion in the latest $1.9 trillion stimulus bill. This bill also expanded eligibility to some nonprofits and online publishers. This month’s package includes a $28.6 billion grant program for restaurants. Restaurants that have received PPP money can tap the fund if they can demonstrate enough revenue loss. It has not been announced as to how the SBA will be distributing those grants.

With the latest PPP round, some businesses were able to apply for a second loan, if they had already used their first one and met the requirements regarding the number of employees as well as being able to demonstrate a decline in revenue. Unfortunately, these new forms and exclusive access periods for some small businesses meant that the roll-out of additional funding was slow and many applicants waited weeks for their financing to be processed.

Talley’s professionals have spent hundreds of hours reviewing the law, regulations, and SBA PPP FAQs issued on an almost daily basis and we are happy to assist you in the process. We are available to simply answer a quick question or assist in the application and/or forgiveness audit process.

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