IRS Pushes Tax Deadline

Taxpayers now have more time to compile their 2020 income taxes as the Internal Revenue Service (IRS) moves this year’s tax-filing deadline to May 17th, offering taxpayers and their accountants a huge sigh of relief. This move comes following many pleas from lawmakers and accountants to extend the deadline amid recent changes to U.S. tax laws. More than 100 House members signed a letter earlier this week urging the IRS to institute the delay.

“This extension is absolutely necessary to give Americans some needed flexibility in a time of unprecedented crisis,” said House Ways and Means Oversight Subcommittee Chairman Bill Pascrell Jr., D-N.J., and House Ways and Means Chairman Richard Neal, D-Mass. in a statement on Wednesday, March 17.

This move by the IRS and the U.S. Treasury Department comes following the $1.9 trillion stimulus package passed last week that added even more changes to an already complex tax-filing year. The extension also allows the agencies more time to process tax returns while simultaneously completing the task of sending another round of stimulus checks to many Americans.

The IRS emphasized the extended deadline only applies to federal tax returns and encouraged taxpayers to check with their state. Not all states follow the federal filing deadline and may set their own.

Many accountants are still awaiting guidance from the IRS on items that affect the current tax season. Jeff Spiegel, CPA and Founding Principal of Spiegel Accountancy Corp. says, “The IRS and tax software systems still have not completed their programs and forms for all of the changes from the many bills that have passed over the past 12 months.”

Last year, the IRS extended the filing season to July 15 due to issues related to the COVID-19 pandemic.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

All About Gift Tax

When giving assets to a beneficiary, whether cash or property, the government may want to know about it and might even want to collect what the Internal Revenue Service (IRS) refers to as a gift tax. 

Fortunately, a large portion of some gifts or estate assets are excluded from taxation and there are numerous ways to give assets tax-free.

 

Some exclusions are:

Using the annual gift tax exclusion of $15,000

Using the lifetime gift and estate tax exemption

Making direct payments to medical and educational providers on behalf of a loved one

In general, aside from reductions in the taxable estate, there are other perks to giving assets to family members or loved ones while still living. Giving today offers immediate assistance to all beneficiaries while providing the extra enjoyment of witnessing the joy of seeing how the gifts improve their lives.

The gift tax exclusion

Current rules allow funds to be given to any number of people up to $15,000 each in a single year without incurring a taxable gift ($30,000 for if married with a spouse’s gift). The recipient owes no taxes when they receive the gift and does not have to report the gift unless it comes from a foreign source.

If the amount given to any person during the same year exceeds $15,000, the grantor (person making the gift) must file a gift tax return (IRS Form 709). Once the gift exceeds the annual gift tax exclusion, taxes begin to chip away at the lifetime gift and estate tax exemption as discussed next.

The gift and estate tax exemption

The passage of the Tax Cuts and Jobs Act (TCJA) increased the gift and estate tax exemption significantly. Prior to 2018, the exemption amount was $5.49 million. The TCJA increased that amount to $11.7 million for estates 2018 forward. The Federal gift and estate tax rate is 40%.

The $11.7 million exemption applies to gifts and estate taxes combined. Whatever exemption used for gifting reduces the amount eligible for the estate tax. The IRS refers to this as a “unified credit.” Each grantor has a separate lifetime exemption that can be used before any out-of-pocket gift or estate tax is due. In addition, a married couple can combine their exemptions to get a total exemption of $23.4 million with a proper estate plan.

There is one big caveat to be aware of. The $11.7 million exception is temporary and only applies to tax years up to 2025, at which time it will revert to the $5.49 million exemption (adjusted for inflation). It might be a smart move to take advantage of the new exemption before it disappears after 2025. Although, Congress may decide to make these changes permanent after 2025 the exemption expires.

Lock in the higher exemption now

For most people, the gift and estate tax exemption allows for the tax-free transfer of wealth from one generation to the next. There are several other strategies that could be advantageous for those who have acquired enough wealth to surpass the gift and estate tax exemption.

Many individuals find it best to transfer their wealth to their loved ones now, rather than willing it to them later. There are two advantages to giving assets today. First is the chance to see them enjoy the benefits. Second, any increase in the value of the gifted assets could increase in value for beneficiaries, rather than the taxable estate. This would shift the increase in the value of the estate to the next generation and avoid estate tax.

For example: If an individual gives his or her entire estate of $11.7 million to their children today, those assets could increase in value over time. At a growth rate of 5% per year for 10 years, that $11.7 million gift could end up being worth over $19 million, and the heirs will have received the entire amount free from gift or estate taxes. Weigh that against holding those same assets until passing away 10 years later. That increase in value would be taxed at 40%. Additionally, should the gift and estate tax exemption revert to the lower $5.49 million amount (for dates after 2025), the result would be an even larger estate tax amount upon passing.

Ensuring gifts are managed responsibly

One concern many people have when it comes to giving assets away early is that sometimes the person receiving the gift may not be ready to handle the responsibility of managing such a large amount of money or assets. A good example of this is a large amount of money gifted to a young child or teenager. One option for gifting those assets and ensure they are protected from misuse would be to give them to an irrevocable trust and have the child or teenager listed as the beneficiary.

This method allows rules to be set for the trust along with instructions on how the assets will be invested and distributed. For example, create a trust that stipulates the beneficiary can only have access to the income generated once the beneficiary graduates from college. It is also possible to specify when the trust would distribute the assets and at what age, circumstances, etc. There are numerous options when it comes to structuring a trust with each state having its own rules.

Other ways to give tax-free

Make unlimited payments directly to medical providers or educational institutions on behalf of others without incurring a taxable gift or affecting the $15,000 gift exclusion. This method is a great way to assist someone with large medical bills or provide for a family member’s education. For example, it is possible to pay $50,000 tuition for a grandchild’s medical degree by making payments directly to the university, while also gifting an additional $15,000 per year tax-free.

Tax effect to the recipient of gifts

One thing to remember about gifting assets is that the cost basis in the assets will transfer over to the recipient. In other words, if a gifted asset appreciates in value significantly prior to the gift, the recipient could incur a substantial taxable gain when selling that asset. On the other hand, highly appreciated assets that are received as part of an estate on death get a “step up” in basis to the value at death, which means a taxable gain could be avoided if the asset is sold after death. It is important to carefully select what assets can be gifted to minimize the impact of taxes. In general, cash and assets with little appreciation are better for gifts, while highly appreciated assets are better transferred as part of the estate.

In summary

Lifetime gifting can be a great strategy if enough is left over for personal living expenses. For the gift to count, it must be a complete and irrevocable transfer. This article focuses on the federal tax implications for gifting and estates; however, there could be state tax consequences for gifts and estate. Take the time to meet with a tax and estate planning professional to ensure all gift and estate plans are well thought out and properly implemented.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

Cryptocurrency and Tax Law

The IRS has increased scrutiny on Bitcoin and other cryptocurrency transactions in its effort to make those aware who previously neglected to declare these forms of virtual investments. The first question on the 2020 tax year Form 1040 for individuals asks about virtual currency transactions. However, the degree to which the investment is taxed depends on a person’s overall income and how long the currency has been held.

If the cryptocurrency was held for one year or less, it is considered short-term capital gains, and profits will be taxed at the overall income rate. Any profits earned on virtual currency that is held longer than one year is considered long-term capital gains and, depending on annual income, are normally taxed at a lower rate.

Purchases made using virtual currency.

Quite a few people invested in Bitcoin when it was relatively low, and many crypto investors decide to sell in 2020 to make a quick profit while the market was high. In addition to declaring capital gains, the IRS also expects a report to be made on gains and losses attached to crypto investment activity or purchases made using cryptocurrency such as Bitcoin.

For example, a crypto investor uses a $10,000 Bitcoin to purchase a new $2,500 computer – an asset that depreciates in value. The IRS expects a calculation based on the value of the Bitcoin at the time of the transaction and recognize any capital gains or losses relative to the cost or fair market value.

Whether or not an investor sold or retained cryptocurrency in 2020, for federal tax purposes, all virtual currency is treated as property; therefore, general tax principles applicable to property transactions also apply to transactions using virtual currency. Even purchasing a cup of coffee with cryptocurrency has tax implications.

Crypto used for services.

Many companies in the tech industry have begun paying employees with Bitcoin and other cryptocurrencies. While the practice is a bit of a novelty, some firms see this as a way to attract more tech-savvy talent.

Both employee and employer should keep a record of the fair market value of the crypto paid as wages, measured in U.S. dollars at the date of receipt. These wages are subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA), and Federal unemployment taxes. All must be reported on Form W-2, Wage and Tax Statement.

On the flip side, employers who pay for services using virtual currency held as an asset must evaluate capital gains or losses for that exchange. The gain or loss is determined by the difference between the fair market value at the time of the exchange for services received and the adjusted basis in the virtual currency exchanged.

Charitable donations and crypto.

 Donating to charity through cryptocurrency can reduce tax liability on the investment According to IRS code Section 170(c), donations made to a charity using virtual currency will not be recognized as income, gain, or loss from the donation. Any charitable deduction made would be recognized as being equal to the fair market value of the virtual currency at the time of donation, provided the investment has been held over a period of one year. Any deductions made using cryptocurrency held for a year or less would be based on the lesser of the virtual currency or the value of the currency at the time of the donation.

Charitable organizations that receive virtual currency should treat the donation as a noncash contribution and can assist a donor by providing the contemporaneous written acknowledgment, something the donor must obtain if claiming a deduction of $250 or more for the virtual currency donation.

It is important to maintain detailed records of all cryptocurrency transactions. This includes receipts and the amount of purchases or donations, plus the value of the virtual currency on the date of each transaction.

For other questions regarding the tax treatment of virtual currency, refer to Notice 2014-21 and Rev. Rul. 2019-24.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

Why File a Tax Extension

There are a variety of reasons for filing a tax extension; however, having an extra six months to complete the filing process would be at the top, particularly for the 2020 tax year. Aside from normal tweaks to tax laws, American taxpayers may need extra time to sift through the many changes made through the CARES Act and economic stimulus packages.

Filing an extension provides more time to gather documents to make sure every possible tax credit and deduction gets applied. It is so simple to file a tax extension that millions of taxpayers file personal or business extensions every year.

Who is eligible?

Every American taxpayer is eligible to file for a six-month extension. The IRS does not require an explanation to file. Simply fill out the appropriate extension form and submit it to the IRS by March 15th for most businesses, or April 15th for individuals.

What makes this a good year to file an extension?

With the passing of the Covid relief bills, tax laws and regulations have seen significant changes. Many of the changes that occurred during 2020 are still being interpreted and modified as the upcoming tax deadlines approach. An extension allows time to ensure all eligible new deductions or credits that could not be claimed before are being captured. In addition, the extension avoids having to amend a timely filing for a modification to all new rules, as well as any anticipated changes that could arise from any other legislative bills that may pass this year.

Investment partnerships and K-1s.

A tax extension offers more time to compile and organize tax information for investment 1099s and partnership K-1s. Plus, filing an extension might help prevent mistakes on tax forms made by rushing through a tax return while also allowing the taxpayer time to review the return with a tax professional. Essentially, taking more time to complete complex tax returns could result in a more beneficial tax return.

Might reduce the chance of an IRS audit.

It is a little-known fact that the IRS tends to fill its audit quota in April when most people file their taxes. Waiting to file in September or October could reduce the odds of being audited, as the IRS typically selects fewer returns for a potential examination.

More focused attention by tax preparers.

The first quarter of the year is the busiest for most tax preparers and becomes more hectic closer to April. It could be extremely difficult to book an appointment with a CPA during this period, especially for anyone who might not have felt motivated to get an earlier start on gathering their tax documents. Filing after April allows tax accountants to focus more on the details while having additional time to employ every feasible tax credit.

How do I file an extension?

Any tax professional can file an extension electronically, using Form 4868 or Form 7004, for either an individual or a business. Keep in mind that filing for an extension of time to file your tax return does not also extend your time to pay any tax liability you may have. It is easy to pay the amount due using the IRS and State online secured ACH systems. Please consult your tax professional for assistance in preparing your extension and determining the amount of taxes due by the tax deadline.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.