Take a look at the American Families Plan … which sets forth President Biden’s domestic priorities on education, paid leave for workers and more.
There are lots of tax proposals for individuals.
They include tax breaks and tax increases. Note that the plan’s description of desired tax changes is vague, likely intentionally so. And details are scarce.
First up, the proposed tax relief measures:
Extend the higher child tax credit to 2025 and make full refundability permanent. At present, the expansions enacted in March apply only for 2021.
And make permanent recent expansions to three other individual tax credits.
Now for the tax hikes proposed by Biden to fund the programs in his plan.
He would raise the top income tax rate on individuals from 37% to 39.6%, reportedly for single filers with incomes above $452,700 … $509,300 for joint filers.
Long-term capital gains of millionaires would be taxed at 39.6% … up from 20%. Adding the 3.8% surtax on net investment income, the rate is 43.4%. Taxpayers reporting $1 million or more of income on their returns would be impacted. We understand that the same income threshold would apply to single and joint returns.
Biden wants to change how unrealized gains are taxed at death. His plan proposes to eliminate stepped-up basis in inherited assets upon death. Although details are fuzzy, we believe this means that unrealized appreciation in assets owned by an individual would be subject to federal income tax upon death.
There are some big exceptions: Gains of less than $1 million … $2 million for a couple … would not be taxed. Property donated to charity would also be exempt. Family-owned businesses and farms would escape tax, provided the heirs run them. And the existing $250,000 (or $500,000) exclusion on sales of main homes would apply. Unspecified exceptions may include transfers to spouses and potentially some trusts.
The current estate tax rate and exemption amount would remain unchanged.
Among other revenue-raising ideas: Capping the deferral from like-kind swaps of real property at $500,000. Expanding the 3.8% surtax to cover other types of income. Giving IRS money for audits of wealthy individuals, large corporations, pass-throughs and more. Requiring financial institutions to report more information to the agency. Plus providing IRS with the authority to regulate unenrolled tax return preparers.
Biden’s plan is a starting point and will not pass Congress as-is. It is bound to evolve, with many compromises expected to be made over time.
Enacting tax hikes will be difficult in general. There is zero GOP support for higher taxes. Senate Democrats would again have to turn to budget reconciliation to allow tax increases on individuals to pass the Senate with a simple-majority vote. And getting all Democratic senators to support tax increases is not a given.
But even if tax hikes do pass this year, we don’t think they’ll be retroactive.
Lifting the cap on SALT deductions is a priority for some in Congress. The 2017 tax reform law capped the deduction for state and local taxes claimed on Schedule A at $10,000. Since then, some lawmakers from high-tax states, such as N.Y., N.J. and Calif., have been pushing to repeal or increase the limit. A group of N.Y. lawmakers has threatened to oppose any forthcoming tax legislation that doesn’t include a full repeal of the SALT limitation and has told Biden this.
Two sticking points lawmakers must overcome: Scrapping the $10,000 limit would primarily benefit upper-incomers. Plus the cost of repeal on federal revenues. So it’s no surprise that SALT cap repeal isn’t in Biden’s American Families Plan, although administration officials say it will be part of the conversation going forward.
Expect House Democratic leaders to broker some sort of compromise behind the scenes … maybe proposing to temporarily lift the cap to $15,000.
The due date for filing individual returns is about two weeks away … May 17.
If you’re not ready to file by this date, you can get an extension to Oct. 15. But remember, the additional time extends only the tax return filing deadline. You’ll still need to figure the tax you owe and pay that by May 17 to avoid penalties.
There are a few ways to get an extension: File Form 4868 by May 17 and include a check if you expect to owe tax. You can either mail in the form or use IRS’s Free File to file electronically. Another option is to pay electronically through IRS’s Direct Pay service or the Electronic Federal Tax Payment System. Or, for a fee, charge an extension-related tax payment on your credit card.
What if you can’t pay the tax you owe? Timely file your return or extension and pay as much as you can. Look into applying for an online installment agreement. If IRS accepts the plan, you can make the payments in monthly installments. You can also find out whether you are eligible to submit an offer in compromise that lets you settle your federal income tax debt for less than what you owe. Try calling IRS to discuss these and other tax payment relief options, such as short-term payment extensions and temporary delay of collection efforts.
Consider asking for a penalty waiver under IRS’s first-time abatement policy. IRS will OK a waiver of the late filing or late payment penalties for filers who pay or arrange to pay the tax due and have been tax-compliant for the past three years. The penalties for late payroll tax deposits and delinquent returns of S corporations or partnerships are also eligible for the waiver if the conditions are satisfied.
You have to request the waiver. The abatement isn’t provided automatically. Also, check to see if you have reasonable cause to get the penalty dismissed.
Filed your 2020 return and awaiting your refund? It could be delayed.
IRS is holding 16 million individual returns for manual processing. These include returns using 2019 income to figure the 2020 earned income tax credit, returns showing inconsistencies between IRS’s records on stimulus checks paid and the recovery rebate credit reported on the 1040, plus returns with other errors or potential fraud issues. 11 million business and other returns are also delayed. And believe it or not, IRS is still processing some 2019 individual returns.
Calling IRS’s toll-free line about your refund or other tax queries?
Good luck in reaching a live person. The agency’s phone service is dismal. As of April 10, IRS employees have answered only 2% of calls to the 1040 number. This means that only one out of 50 calls have gotten through to a live operator, and the average wait time on hold for these lucky callers was 20 minutes. And if you are calling about a delayed refund, expect even more frustration. Even if you can reach a live person, it’s unlikely the operator can help you much. IRS systems don’t give a reason for why a return is needed for further manual review.
Taking big losses from a horse activity is sure to draw IRS scrutiny. An owner of an insurance business offset his income with a series of losses from competing in team roping contests. IRS pulled the return and nixed the losses, claiming that he didn’t conduct the activity with a primary intent to earn a profit. The Tax Court agreed his team roping was a hobby. Though he devoted lots of time and effort to it, other factors weighed against him (Gallegos, TC Memo. 2021-25).
A life-insurance-based welfare benefit plan causes tax woes. An S corporation adopted a marketed plan that used life insurance to provide death and other benefits to the company’s sole shareholder, his wife and four other employees. The Tax Court ruled in 2018 that the plan constituted a split-dollar life insurance arrangement, and the owner and his wife owe tax on the economic benefits they realized by participating in the plan. The Court now says that income is akin to compensation, and not shareholder distributions, because the arrangement afforded benefits to the husband in his capacity as an employee (De Los Santos, 156 TC No. 9).
A Calif. retail seller of marijuana can deduct only the cost of the drugs … what it paid for the inventory and its transportation costs in acquiring the weed … an appeals court decides in affirming a 2018 Tax Court decision. Other expenses aren’t deductible, even though marijuana is legal in Calif. Note that the appeals court declined to rule on the constitutionality of the federal statute that bars tax write-offs for sellers of substances that are illegal under U.S. law, because that argument wasn’t raised in the Tax Court (Patients Mutual Assistance Collective Corp., 9th Cir.).
Willful nonpayment of federal income taxes precludes bankruptcy relief. A lawyer who failed to pay taxes for multiple years later filed bankruptcy after IRS sued to collect the overdue taxes. He asked a lower court to wipe out the debt. The court refused, saying he voluntarily and intentionally violated his duty to pay taxes. In reaching its decision, the court relied in part on the lawyer’s lavish spending on vacations, dining, luxury gifts, big donations and other discretionary purchases. An appeals court agreed that the federal tax debt isn’t dischargeable (Helton, 6th Cir.).
IRS disagrees with a Tax Court case on the insolvency exclusion and pensions. Taxpayers whose liabilities are greater than the value of their assets can exclude income from canceled debts up to the amount of their insolvency. In a 2017 case, the Court held that a retired police officer’s interest in a pension plan isn’t treated as an asset for figuring insolvency because it couldn’t be converted into a lump-sum cash amount, nor could it be assigned, sold or borrowed against. The Service says the Court’s analysis is incorrect, and it will not follow the decision.
Can a lender collect on a debt after issuing Form 1099-C to the defaulter?
A district court says yes. After a couple failed to pay their consumer loan, the bank won a court judgment against them. The parties then tried to settle the debt, but to no avail. Eventually, the bank sent the couple a 1099-C reporting $200,000 of debt cancellation income. They claimed that the bank’s issuance of the 1099-C resulted in the debt being forgiven and the judgment voided. According to the court, the bank was required by IRS regulations to issue the 1099-C, and doing so didn’t result in the actual discharge of the couple’s debt (Gericke v. Truist, D.C., N.J.).
Receipt of new cryptocurrency following bitcoin’s 2017 hard fork is income, IRS attorneys say. A hard fork can occur when a digital currency’s blockchain is split into two as a result of certain software changes. Bitcoin underwent a hard fork in 2017, which led to the creation of new cryptocurrency called Bitcoin Cash. In the transaction, holders of bitcoin received Bitcoin Cash in a 1-to-1 ratio. Taxpayers who got Bitcoin Cash have ordinary income equal to its fair market value.
Giving your employees paid time off to get their COVID-19 vaccine?
Your business may qualify for a payroll tax break, IRS says. Businesses and tax-exempt organizations with fewer than 500 employees that provide paid sick and family leave to workers affected by coronavirus get a limited payroll tax credit against the employer’s portion of Medicare taxes. This includes paid leave taken by workers to receive coronavirus vaccinations or to recover from any injury, illness or condition related to the vaccinations. These payroll tax credits are available for wages paid for employee leave taken from April 1, 2021, through Sept. 30, 2021. Self-employed individuals also qualify.
A same-sex male couple cannot deduct in vitro fertilization costs, IRS privately rules. The couple plan to have eggs donated by one man’s sister to be fertilized by the other man’s sperm, with the embryo implanted in the womb of an unrelated gestational surrogate. The couple sought a ruling from the Service on whether they can deduct as Schedule A medical expenses the costs of egg retrieval, the IVF procedure, childbirth expenses for the surrogate and more. According to IRS, most of the costs aren’t incurred for the medical care of the couple or any dependent. Only expenses for sperm donation and sperm freezing qualify as deductible medicals.
Congress gave good and bad news to multiemployer pension plans.
Financially troubled plans got relief in the American Rescue Plan Act. Insolvent plans in critical and declining status that meet other eligibility criteria will be able to apply for special financial assistance to pay benefits through 2051 from a new Treasury-backed fund within the Pension Benefit Guaranty Corp. PBGC is required to issue guidance on the application process by early July.
But plans also have to pay higher insurance premiums, starting in 2031. Congress hiked the premiums multiemployer pension plans must pay to PBGC. The flat-rate premium increases to $52 per person per plan year … up from $31 now.
The Revenue Service’s exam record of business tax returns is woeful.
Too many audits result in no change to taxes. Per agency statistics, 30% of C corporation audits, 41% of partnership exams, and 31% of S firm audits that were conducted by agents in the field in 2019 resulted in no change to taxes. Compare these figures with the 9% no-change rate on field audits of individuals.
Why is this the case? No one really knows the answer, but some tax pros surmise that one reason could be the lack of training provided to IRS auditors compared with the high-priced tax expertise that businesses bring to the table.
Also dismal is the IRS audit rate of tax-exempt organizations. In 2019, one in every 742 exempt groups … and only one in 5,000 churches … were audited. The sources of exams come from compliance strategies involving specific issues, data analysis, referrals from internal and external sources, and other casework.
IRS is serious about cracking down on promoters of abusive tax schemes. It has a new office of promoter investigations and just named a temporary coordinator … a woman with more than 20 years of enforcement experience within the agency. The office will work to expand detection and deterrence of suspect transactions. Two schemes that command lots of IRS attention and will keep this official busy: Abusive microcaptive insurance structures and syndicated easement donations.