According to a report released recently by the Government Accountability Office (GAO), it has been found that in recent years the IRS has been auditing fewer taxpayers since 2010, with audit rates for wealthier taxpayers decreasing the most. The IRS officials blame the decline in audit rates on staffing decreases and the fact that it takes more staff time and expertise to handle complex higher-income audits. From tax years 2010 to 2019, audit rates of individual income tax returns decreased for all income levels, according to the findings. On average, the audit rate for these returns decreased from 0.9% to 0.25%. However, while audit rates saw a greater decline for higher-income taxpayers, the IRS generally audited them at higher rates than lower-income taxpayers. 

The average number of hours spent per audit was generally stable for lower-income taxpayers but more than doubled for those with incomes of $200,000 and above. According to IRS officials, the greater complexity of higher-income audits and increased case transfers due to auditor attrition contributed to the time increase. In response to the report, the deputy commissioner of services and enforcement at the IRS, Douglas O’Donnell, commented that auditing requires auditors to appropriately respond to taxpayers with increasingly complex business and investment activities. The greater the complexity, the more sophistication, skill, and time to perform the necessary review of information and correctly apply the law. 

House Ways and Means Oversight Subcommittee chair Bill Pascrell, had requested the GAO report and criticized the findings. His office found that except for those with over $5 million in income, audits of the lowest-income taxpayers resulted in higher amounts of recommended tax per audit hour. The IRS collected about one-half of all recommended taxes between 2011 and 2020, with collection rates generally higher for those taxpayers with incomes under $200,000, including Earned Income Tax Credits (EITC) recipients. That is probably because the IRS conducts EITC audits before issuing refunds. According to the IRS, high-income audits are more likely to have recommended tax amounts that are abated or more challenging to collect fully.

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.

Wealthy investors may face new restrictions when transferring assets to heirs, due to a recent proposal by the Treasury Department. The Department stated that it would “claw back” the tax savings of several wealth planning strategies come 2026 when historically high exemption levels for gift and estate taxes are due to be sliced in half. The proposal reflects the Biden administration’s concern that affluent Americans are racing to use clever strategies during the window to create “artificial” gifts to pass on tax-free wealth to future generations. The proposal targets strategies in which a taxpayer gives assets to a beneficiary while maintaining control over a substantial interest in them. These strategies are what the IRS considers to be a disguised gift that is taxable. It is a fresh blow to affluent investors and their advisors who thought their careful plans were laid in stone. 

Under scrutiny. One arrangement in the crosshairs is a partnership in which a regular interest is given to an heir while the donor retains a preferred interest. Another scenario concerns a promise by a donor to make gifts to a recipient in the future. A third example involves a trust to which a grantor transfers assets but also receives income from the gifted property. In all three instances, the moves use up some or all of a donor’s exemption, which this year is just over $12 million, $24 million for married couples. These higher levels, a product of the 2017 tax-code overhaul, will fall roughly by half come 2026. The Treasury proposal would claw back taxes on transferred amounts that exceed the lower exemption levels for people using the strategies who may die that year. The lifetime gift and estate tax rate is 40%. The goal of this is not to allow wealthy taxpayers to lock in the currently high use-it-or-lose exemption amount.

GRATs. A common estate planning technique, Grantor Retained Annuity Trusts (GRATs), may also get caught even though the strategy does not technically involve artificial gifts. Under the Treasury’s proposal, the IRS would calculate the tax bill of a donor who retains an interest of more than 5% of the value of assets they transfer to a GRAT under the lower exemption. If the donor dies before the trust’s term ends, their stake is pulled back into their estate, resulting in a bigger tax bill on assets they thought they had moved out. For example, suppose a donor put $100 million into a GRAT for the benefit of their children last year, under IRS rules. In that case, the trust pays them a yearly “annuity” that totals slightly more than the value of the contributed property or cash over time. In the eyes of the tax agency, the paybacks reduce the taxable value of the gift, say in this case, to $10 million. So the donor has shifted $100 million out of their estate to benefit their kids but used up only $10 million of her current exemption. Meanwhile, the trust appreciates, and its gains go to the children tax-free. Under the proposal, because the taxable value of the gift is more than 5% of the transferred amount, the donor has not locked that $10 million of their currently higher exemption. Meaning they would thus face a higher tax bill come 2026. One big issue is that the strategies on the firing line are irrevocable. They are legal contracts that cannot be unwound. 

Saved by Zero. However, there seems to be a silver lining to the 5% rule. It will not apply to so-called zeroed-out GRATs, in which annuities equal the original value of what was put into the trust. This is because, under current IRS rules, such a trust does not use up any of a donor’s exemption, even as it moves money out of the estate. Assets in that trust, a staple with the 1 percent, appreciate over time, and the left over after annuities goes to heirs tax-free. The proposal also does not affect nuts-and-bolts planning in which a donor bequeaths property while keeping control or possession of it while alive. For example, suppose Grandma and Grandpa have an estate worth $20 million and set their son up to inherit $7 million when they die. In that case, they can safely use their current exemption of over $24 million if they pass away after 2026.

The 10-year itch. Wealth advisors are already chafing from severe curbs on inherited retirement accounts. Under a law that Congress passed in 2019, heirs to traditional individual retirement accounts (IRAs) and workplace retirement plans, including 401(k)s, 403(b)s for educators and 457(b) deferred compensation plans, can no longer “stretch” required minimum withdrawals out over their lifetimes. Instead, they have to drain the accounts within ten years. In May 2021, the IRS said that beneficiaries of the accounts were not required to take annual distributions before the 10-year deadline. Advisors breathed a sigh of relief because it gave the tax-deferred accounts more time to appreciate. But on Feb. 23, Treasury reversed course, issuing another little-noticed proposal to require minimum annual distributions in years one through nine. That rule applies to heirs who are not spouses or children under age 18 and inherit a retirement account starting in 2020. However, this does not include Roth Plans.

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.

In response to the pandemic, Congress provided billions of dollars in tax credits to employers, which helped pay for sick and family leave, as well as retaining employees, but now the IRS needs to step up its compliance efforts, according to a new report. The report, released in early May by the Government Accountability Office (GAO), examined the impact of Congress’ various pandemic relief laws since 2020. This includes the CARES Act and the Families First Coronavirus Response Act. Provisions in those laws established paid sick and family leave credits, the Employee Retention Credit and payroll tax deferrals. As Congress enacted the new laws, the IRS continued to revise the relevant employment tax returns and guidance. The IRS managed to implement those complex provisions despite facing delays caused by facility closures and other challenges. Paid sick and family leave credits and Employee Retention Credits for 2020 totaled about $20.7 billion, including $9.8 billion for the leave credits claimed by over 1.5 million employers and $10.9 billion for the ERC claimed by 199,834 employers. Payroll tax deferrals totaled about $123.6 billion claimed by over 1 million employers. The totals seem to have been even higher last year, according to preliminary data.

The GAO noted that the IRS took steps to identify and plan for compliance risks associated with the leave credits and the ERC. Both types of credits expired last year but will be subject to examination by the IRS for several years after filing. The report found the IRS could strengthen its efforts by expanding the use of some of its project management practices. The IRS’ compliance objectives did not evolve to reflect statutory changes made after the CARES Act, are not measurable, and do not include criteria to measure success. In preliminary data, GAO found 337 filings, totaling $100 million, from employers that were established in April 2020 or later but then stopped filing employment tax returns. IRS screening filters flagged more than 65% of these filers for review. However, the GAO said those controls may still overlook ineligible entities because they do not consider certain factors, such as refund amounts and employer establishment dates.

The GAO recommended that the IRS could bolster its controls by using dates from the relevant legislation, refund amount and filing data, the establishment date for the employer, and other variables in filters to help identify tax credit recipients that may be ineligible employers. The GAO noted that one area of potential fraud was employer identification numbers. Although the employment tax return screening process flagged many of the returns identified with potentially ineligible credit claims, the report said it is possible some returns from fabricated EINs may have passed through the filters and received refunds. Annual employment tax returns are subject to fewer filters. In addition, none of the filters contains specific criteria to identify entities established after the enactment of the Families First Coronavirus Response Act and the CARES Act. IRS officials shared a list of compliance areas under consideration for using computerized filters to identify potential noncompliance specific to the tax credits. However, those areas are still under development, and the IRS did not have any further information in the most recent compliance plan. The GAO made other recommendations in the report, including the IRS developing a compliance plan consistent with project management principles, document compliance processes for adjusted returns and tax credits using restricted wages, and identify ineligible entities. The IRS agreed with two of the report’s recommendations but disagreed with the other three. The IRS contended that its current processes are sufficient, but the GAO insisted its recommendations are warranted.

Talley’s professionals have spent literally hundreds of hours reviewing the law, regulations, and FAQs issued regarding the ERC and PPP, and we are happy to assist you in the process.

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.

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.


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