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Tax Update September 30, 2021 – Business Tax Breaks and the Self Employed

There are lots of breaks for buyers of business vehicles under the tax laws. The annual depreciation caps for passenger autos rise a bit in 2021. If bonus depreciation is claimed, the first-year ceiling is $18,200 for new and used cars first put in service this year. The second- and third-year caps are $16,400 and $9,800. After that…$5,860. If no bonus depreciation is taken, the first-year cap is $10,200.  Buyers of heavy SUVs used solely for business can write off the full cost, thanks to bonus depreciation. SUVs must have a gross weight rating over 6,000 pounds.

Also, up to 100% of the cost of a big pickup truck can be expensed. When expensing business assets, the amount expensed can’t exceed taxable income from the taxpayer’s business. Bonus depreciation does not have this limit.

Leasing a vehicle to use in your business is much cheaper taxwise in 2021. If a car that is worth more than $51,000 is first leased for business during the year, the lessee must pay income tax each year on an amount spelled out in IRS tables.  For example, on a three-year lease for a $75,000 car with a lease term starting in 2021, you reduce the size of your tax deductions for the monthly payments on the vehicle by $8 in 2021, $18 the next year and $26 in 2023. See Rev. Proc. 2021-31.

S corporations that pay low salaries to owners should be a bigger IRS target,  Treasury inspectors say. Many S corporation shareholders take low salaries so the bulk of their profits are passed through to their own 1040 individual returns free of Social Security and Medicare taxes. The Service may balk at this practice, but it is falling behind on enforcing the rules. In 2018, IRS audited a measly 0.2% of all S corporations. Even when the agency does select a firm for examination, half of the time its revenue agents don’t even evaluate officer compensation.

IRS says its policies and procedures properly address the compliance risk.

Real estate professionals must meet two tests to beat the passive-activity loss rules and deduct their rental losses in full. They must spend over half their working hours and more than 750 hours a year materially participating in real estate activities.  IRS often has success in court when challenging real-estate pro status.

Self-employeds can deduct their Medicare premiums above the line. Medicare premiums paid by a self-employed individual are included in the deduction for health insurance on Schedule 1 of the 1040. This also applies for partners, provided the partnership reimburses the partner for the premiums and the amounts are reported as guaranteed payments that are taxed as income. Similar rules apply to S corporation shareholders who own more than 2% of the firm when the shareholder pays the premiums and then gets reimbursed by the S firm. Note that the premiums must be included as wages on the shareholder’s W-2 form.

Filing Deadline – 10/15/21

Clients who requested extensions to file their 2020 tax returns of the upcoming Oct. 15 due date. People who asked for an extension should file on or before the extension deadline to avoid the penalty for filing late.

The third batch of advance Child Tax Credit payments for the month of September, totaling about $15 billion, is reaching about 35 million families across the country. Under the American Rescue Plan, most eligible families received payments dated July 15 and Aug. 13, along with the Sept. 15 payment. For these families, each payment is up to $300 per month for each child younger than age 6 and up to $250 per month for each child ages 6 through 17.

Tax Update August 2021

Businesses can deduct 100% of restaurant meals in 2021 and 2022. The late 2020 stimulus law provides temporary relief from the 50% haircut that normally applies to the business meals write-off. The easing applies only to food and beverages purchased at a restaurant for takeout or dining in at the establishment.  Client meals and meals on travel are included. The taxpayer or an employee must be at the meal, and the cost can’t be lavish or extravagant. Prepackaged food

or beverages bought at a store or similar facility do not qualify for the 100% write-off. Neither does the cost of meals at an employer-operated facility such as a cafeteria.

RMDs are back, after being halted last year. Folks 72 and older must take annual RMDs from traditional IRAs or pay a 50% penalty. For 2021.  The amounts can be taken from any IRA you pick. The same rules apply to 401(k)s and other workplace defined-contribution plans, with two important exceptions.

First, people who work past 72 can delay RMDs from their current employer’s 401(k) until they retire, provided they don’t own more than 5% of the firm that employs them. Second, for people with multiple 401(k)s, the RMD must be taken from each account.  

If 2021 is your first RMD year, you have until April 1, 2022, to take the RMD. The distribution will still be based on your total IRA balance as of Dec. 31, 2020. If you opt to defer your first RMD to 2022, you will be taxed in 2022 on two payouts: The one for 2021 that you deferred and the RMD for 2022. This doubling up would hike your 2022 income and could push you into a higher income tax bracket.

 Charitable donations made directly from a traditional IRA can save taxes. People 70½ and older can transfer up to $100,000 yearly from IRAs directly to charity. If married, you and your spouse can give up to $100,000 each from your separate IRAs. Qualified charitable distributions can count as RMDs, but they are not taxable and they are not added to your AGI. You can’t deduct the donation on Schedule A. The IRA-to-charity strategy can be a good way to get tax savings from charitable gifts for taxpayers not taking charitable write-offs because of higher standard deductions.  The money from the IRA must go directly to a charitable organization. Transfers to a donor-advised fund, charitable gift annuity, charitable remainder trust or any other life-income or split-interest gift arrangement are not treated as QCDs.

More on advance monthly payments of the child tax credit. One element of the 2021 child tax credit regime requires IRS to make advance payments of the credit each month to qualifying families. The advance payments will account for half of a family’s 2021 child tax credit. IRS will issue these monthly payments to eligible families on July 15, Aug. 13, Sept. 15, Oct. 15, Nov. 15 and Dec. 15.

IRS will base eligibility for the payments on 2020 or 2019 returns. The agency has started sending letters to more than 36 million families that it believes are eligible for the advance child credit payment. The letters are generally for informational purposes. IRS plans to send a second round of letters this summer, and that latter mailing will list the family’s estimated monthly payment. Want to opt out of monthly payments? IRS has an online tool for this.

Here’s an idea to help a child or grandchild who is working this summer:   You can contribute to a Roth IRA for him or her…up to $6,000 for 2021, but not more than the child’s 2021 earnings. Earnings grow tax-free inside the Roth. If you go down this path, you have until April 18, 2022, to make this contribution. The payin counts toward your $15,000-per-donee gift tax exclusion ($30,000 if married).  This can provide a nice nest egg. And there are key tax advantages to Roths. Distributions after age 59½ are nontaxable. Contributions can be pulled out free of tax

at any time. And $10,000 of earnings can be taken out tax-free to buy a first house.

Still waiting for your tax refund on your timely filed 2019 or 2020 return? Millions of others are in the same boat, if that makes you feel any better. As of June 25, IRS had a backlog of 16.7 million 2019 and 2020 individual returns that require manual processing by agency employees. Some of these are paper returns. Others were suspended during electronic processing and need further review. Unfortunately, there is not much that taxpayers or preparers can do about the delays. But there are reasons for some hope. IRS expects to complete the processing of 2019 Forms 1040 that were filed on paper sometime this summer. And new returns are now trickling into IRS at a slower rate than during the midst of filing season.

An inherited an IRA from a relative allows 10 years from your relative’ death to clean out the account. This doesn’t mean payouts must be distributed evenly over a 10-year period. You can wait until year 10 to take out all the money, get annual payouts, or skip multiple years, if you want, as long as the IRA is depleted within 10 years. Many inherited IRA beneficiaries can stretch distributions over their lifetimes: Surviving spouses of the account owner. Beneficiaries who are chronically ill, disabled or not more than 10 years younger than the deceased IRA owner. Minor children (until a child reaches 18). And individuals who inherited IRAs before 2020.

Millions of families have begun receiving monthly child tax credit payments. These advance payments of up to $250 or $300 per child account for one-half of the family’s 2021 child tax credit. Lawmakers hope that these regular payments will help low-income families who struggle to make ends meet on a day-to-day basis. However, the payments don’t go just to low-income families. All families who qualify for the child credit will get payments from July through Dec. unless they opt out. The monthly child credit payments aren’t taxable. On your 2021 Form 1040,

which you file next year, you’ll reconcile the payments you got with your actual credit. If the child credit exceeds the payments that you received, you can claim the excess. If the credit is less than what you got, you may or may not have to repay the excess. IRS will mail a notice by Jan. 31, 2022, showing the total amount of payments made to you. Keep the letter with your tax records to help you fill out your 2021 return.

Year End Tax Update

December 13, 2020

Don’t waste the annual gift tax exclusion. You can give up to $15,000 to each child, grandchild, or any other person in 2020 without having to pay gift tax or tap your lifetime estate and gift tax exemption. Your spouse can also give $15,000 to the same donee, making the tax-free gift $30,000. For example, if you are married with three children and five grandkids, you and your spouse can give up to $30,000 in 2020 to each relative without gift tax consequences. That’s $240,000 in tax-free gifts. Any unused exclusion amount is gone. You can’t use more next year to make up for it. Annual gifts over the exclusion amount will trigger filing of a gift tax return for the year.  But no gift tax will be due unless your total lifetime gifts exceed $11,580,000. If you’ve been considering a large gift to a family member, now’s the time to do it.

 Here are two ways to help your kids or grandkids with their college education:

  1. Pay tuition directly to the school. The payment is nontaxable to the student, it doesn’t count against the $15,000 gift tax exclusion, and it reduces your estate. Ditto for direct payments to a doctor or hospital to cover a donee’s medical expenses.
  2. Contribute to a 529 plan. You can shelter from gift tax up to $75,000 in contributions per beneficiary this year ($150,000 if your spouse agrees). If you put in the maximum, you’ll be treated as gifting $15,000 (or $30,000) to that beneficiary in 2020 and in each of the next four years…2021 through 2024.

You must ask IRS to withdraw a tax lien once the tax liability is fully paid. The Service will withdraw the lien, provided you have paid your tax bill, IRS has released the lien, and you have been tax-compliant for the past three years. A withdrawal of a tax lien expunges the lien immediately from the debtor’s records, and it is as if the lien had never been filed. Use Form 12277 to request a withdrawal. You can ask for a lien withdrawal even if you haven’t fully repaid the debt, provided the amount that you currently owe the Service doesn’t exceed $25,000 and you agree to pay off the rest via monthly debits from your bank account.

Good news for owners of traditional IRAs who turn age 72 this year. You needn’t take your first required minimum distribution. The CARES Act waives RMDs for 2020 from traditional IRAs, 401(k)s and many other retirement plans. If you turn 72 in 2020, your first RMD, which would generally be due by April 1, 2021, is also waived, according to the staff of the bipartisan Joint Com. on Taxation. Thus, your first RMD would be for 2021, which must be paid to you by Dec. 31, 2021.  People who took out an RMD in 2020 have until the later of Aug. 31 or 60 days after the withdrawal to put the money back into the account and treat the distribution and subsequent redeposit as a tax-free rollover.

Taxes withheld on returned RMDs can be recovered on your 2020 return, which you file next year. Say you took out a $25,000 RMD from your IRA on Jan. 20, opted to have 20% in federal taxes withheld, and repaid $25,000 to your IRA by Aug. 31. The $25,000 is treated as a tax-free rollover for federal income tax purposes. You would claim the $5,000 withheld as taxes paid when you file your 2020 1040.

More bad news from IRS for firms that took out paycheck protection loans.   In May, the agency issued public guidance saying that small businesses that have their Paycheck Protection Program loans forgiven cannot deduct expenses that result in forgiveness of the loan. IRS now says firms can’t deduct such expenses paid or incurred in 2020 if firms reasonably expect at year-end to receive forgiveness of the debt in 2021. This is so even if the taxpayer hasn’t yet applied for forgiveness of the PPP loan before the end of 2020 (Revenue Ruling 2020-27). Lobbying groups continue to press Congress for a legislative fix.

Let’s review some practical ways you and your business can save on taxes. The tax laws provide very generous write-offs for business asset purchases: 100% bonus depreciation. Firms can deduct the full cost of qualifying assets, new or used, with lives of 20 years or less, that they buy and place in service this year.

Expensing. Businesses can expense up to $1,040,000 of new or used assets in 2020. This limit phases out dollar for dollar once more than $2,590,000 of assets are placed in service. Additionally, the amount expensed can’t exceed taxable income.

Buying a new or used passenger auto for your business can lead to tax breaks. If bonus depreciation is claimed, the first-year depreciation cap is $18,100 for vehicles bought after Sept. 27, 2017 and put in use this year. The second- and third-year caps are $16,100 and $9,700. After that…$5,760. If no bonus depreciation is taken, the first-year regular depreciation ceiling ends up falling sharply to $10,100.  

Buyers of heavy SUVs used solely for business can write off the full cost, thanks to bonus depreciation. SUVs must have a gross weight rating over 6,000 pounds.  Up to 100% of the cost of a big pickup truck can be expensed. As noted above, total amounts expensed can’t exceed the business’s taxable income.

Heed the timing rules for charitable donations and other tax-deductible items. Mail checks by year-end to lock in a 2020 write-off. For charges made with a bank credit card, you claim the write-off in the year you charged the expense. The rules differ for nondeductible gifts. If making a gift by check, the recipient must deposit it by Dec. 31 for it to count as a 2020 gift for gift and estate tax purposes. Make the most of your generosity when donating to charitable organizations.

Contribute appreciated assets, such as stocks or shares in mutual funds.  Provided you owned the property for more than a year, you can deduct its full value in most cases if you itemize. Neither you nor the charity pays tax on the appreciation. Don’t donate property that has declined in value since you acquired it. If you do, the capital loss is wasted. You’re better off selling it, claiming the capital loss on your tax return, and then donating the proceeds to the charity of your choice. You can’t deduct the value of your time spent doing charitable work.

October 1, 2020 Tax Update

The one-year suspension of required minimum distributions can be a blessing to some retirees who don’t otherwise need the funds. The money can continue to grow  tax-free in the IRA, 401(k) or other defined-contribution plan for another year. But it also puts a glitch in a popular income tax withholding strategy. Tax withheld at any point in the year is treated as if evenly paid throughout the year. Some retirees rely on this rule to have taxes they expect to owe withheld from an RMD. With RMDs waived for 2020, consider these options: Make quarterly estimated tax payments. Increase withholding from wages if still working…or Social Security, pension or annuity payments if not.

Does it make sense to do a qualified charitable distribution this year? Yes. Individuals age 70½ and older can transfer up to $100,000 a year from traditional IRAs directly to charity. QCDs are not taxable, nor are they added to your adjusted gross income. This year, with the one-year suspension of RMDs, payouts from traditional IRAs are not required. But IRA owners can still do QCDs, and they remain nontaxable. As always, no charitable write-off can be claimed. 2020 QCDs would reduce your IRA balance for figuring RMDs in 2021 and beyond.

IRS is now accepting electronically filed amended returns for the 2019 tax year. Individuals can use tax software to e-file Form 1040-X to amend a 2019 1040 or 1040-SR. Amended returns for earlier years will still have to be submitted on paper. The Service expects that e-filing will speed up its processing of amended returns and reduce taxpayer errors. IRS says about 3 million Forms 1040-X are filed each year.

Be wary of e-mails, text messages or phone calls that purport to be from IRS. And this year, phishing scams linked to stimulus payments are a threat, Ditto for run-of-the-mill scams. Seniors are one group that is especially at risk.  As older individuals become more adept at using electronic mail and social media, scammers are taking advantage. IRS warns seniors to be alert to fake e-mails, texts, websites and other attempts to steal their personal and financial information.

August 5, 2020 Tax Update

 Want to convert a traditional IRA to a Roth?

Now might be a good time to consider it.  You’ll have to pay income tax on the converted funds for the year of the switch, but once the money is in the Roth IRA, future earnings, and distributions that you take from the account are tax-free.  Present and future income tax rates are key in figuring whether a Roth conversion makes sense. If you expect the tax rate that you’ll pay in retirement will be equal to or higher than the rate on conversion, then switching to a Roth IRA can pay off taxwise, provided you don’t have to tap IRA funds to pay the tax bill on the conversion. If your tax rate in retirement will be lower, tax-free Roth payouts are less advantageous. Income tax rates are low right now, but that might very well change in the future, depending on the state of the economy and who is elected president in Nov.

Other factors to consider when pondering a Roth conversion:  There is no required minimum distribution for owners of Roths… And RMDs from traditional IRAs are waived for 2020 under the stimulus law. Usually, if you do a Roth conversion in a year that you are subject to the RMD rules, you must first take your distribution from your traditional IRA. But not this year.  Converting can pay off if assets in your traditional IRA are depressed in value.

Switching to a Roth before the assets rise in value will result in a lower conversion tax.

The additional income from converting can trigger higher Medicare premiums. For example, individuals owe a monthly surcharge for Medicare Parts B and D coverage for this year on top of their regular premiums if their modified adjusted gross income for 2018 exceeded $87,000…$174,000 for married people who filed a joint tax return.  These figures will be somewhat higher in 2020 for figuring 2022 monthly surcharges.  Income from converting to a Roth IRA is included when calculating modified AGI, so doing a Roth switch this year could lead to higher monthly surcharges in 2022.

Converting can also subject more of your Social Security benefits to tax. 

You don’t need to convert the entire amount to a Roth in one swoop. You can transfer the money in increments over time and space out the tax hit.  Another thing to consider: You can’t undo the conversion for tax purposes. Prior to 2018, if you converted all or part of a traditional IRA to a Roth IRA, you had until Oct. 15 of the year following the conversion to undo the switch and eliminate the tax bill by transferring the funds back to a traditional IRA.  This is called a recharacterization and usually made sense if the Roth lost money after the conversion, as some retirement accounts have done since Jan. 1. Unfortunately, the 2017 tax reform law ended recharacterizations of Roth conversions. You can still convert your IRA to a Roth, but you won’t be able to undo it later. So, if you do a Roth conversion, you are stuck with your original tax bill, even in cases where your IRA assets go down in value after the conversion.

A temporary tax law change helps people who donate lots of cash this year.  The 60%-of-AGI limit on charitable gifts of cash by individuals is suspended for 2020. Gifts to donor-advised funds and private nonoperating foundations are excluded. The easing applies only to charitable cash contributions made this year and deducted on the 2020 Form 1040 or 1040SR that you will file in 2021. Carryovers of excess charitable contributions from prior years don’t get the break.

 Employers must suffer economic hardship from the COVID-19 pandemic to qualify for the break. Eligible employers are those who had to close shop or reduce hours because of a governmental order, or whose gross receipts in a quarter have declined by over 50%, compared with the same quarter in 2019. Tax-exempt groups qualify.

 The credit is 50% of up to $10,000 in qualified wages paid per employee…  So, the maximum credit is $5,000 per worker. Qualified wages are wages paid from March 13 through Dec. 31 of this year and depend on the number of employees in 2019. For firms averaging more than 100 employees, qualified wages are wages paid to employees who aren’t providing services. For smaller firms, all wages are qualified.  Qualified wages also consist of the firm’s cost of employer-provided health care, including the employer’s cost of health coverage for unpaid, furloughed workers. Qualified wages do not include wages computed in figuring the new payroll credit for providing mandated paid sick and family leave to workers affected by COVID-19.

The credit offsets the employer’s 6.2% share of Social Security taxes…  With the excess refundable. Employers claim the credit on Form 941.  They can get the breaks quickly by reducing employment tax deposits otherwise owed to IRS by the amount of payroll credits the business qualifies for. Employment taxes that can be reduced include withheld federal income tax and the employees’ and employer’s shares of Social Security tax and Medicare tax.

Firms can seek advance payment for credits in excess of payroll deposits by filing new Form 7200. Employers can fax the 7200 to IRS at 855-248-0552. Employers will need to reconcile the payroll tax credits, reduced deposits and any advance payments they got when they file their quarterly Form 941.

The provision in the stimulus law that suspends RMDs for 2020 applies to IRAs; defined-contribution retirement plans such as 401(k)s, 403(b)s and 457(b) plans from government employers; and the Federal Thrift Savings Plan.  Owners of inherited IRAs and plans also qualify for the RMD waiver.

Here’s a COVID-19 retirement-related easing that hasn’t got much attention: The 10% fine on pre-age-59½ payouts from retirement accounts is waived on up to $100,000 of coronavirus-related distributions in 2020 from 401(k)s, 403(b)s and IRAs. A coronavirus-related distribution is defined as a payout to an individual who experiences financial difficulties from being diagnosed with COVID-19; who has a spouse or dependent with the disease; or who was laid off, furloughed, saw reduced work hours or had child care issues. The administrator of the plan can rely on the individual’s written certification that he or she meets the conditions.

Employer retirement plans such as 401(k)s are not required to adopt this easing.  Income tax on coronavirus-related distributions can be paid over three years, beginning with the payout year, unless the individual elects to pay the tax all at once. Individuals will use new Form 8915-E to spread the tax on payouts from plans or IRAs.  Amounts recontributed within the three-year time span won’t be taxable. They will be treated as rollovers, and the federal income tax that was paid on the distribution can be recovered by filing an amended return on Form 1040-X.

IRS gives bad news to small firms that take out paycheck protection loans:  The businesses can’t deduct expenses that result in forgiveness of the loan. The stimulus law says that loans forgiven under the Paycheck Protection Program are nontaxable. But the legislation is silent on whether expenses that are funded by the PPP loan proceeds, such as payroll costs, utilities, and rent, are tax-deductible in cases where the loan is forgiven. IRS answered that question in public guidance. To prevent a double tax benefit, the expenses are not deductible (Notice 2020-32).  Congress may need to provide a legislative fix. And that is definitely possible. Did you file a 2019 1040 and elect to apply your refund against 2020 taxes?  You could file a superseding return and get the money paid to you this year if you need the funds. Just file another Form 1040 by the July 15 due date. The second return supersedes the first one and becomes the original return filed. You will have to send the Revenue Service a paper copy of the second 1040.

 Data analytics are increasingly the norm in IRS’s enforcement arsenal. Data-mining software can sift through taxpayer information, expose suspicious activity, identify cases for audit and pull together evidence for cases that go to court. The technology also boosts efficiency, a bright spot for an agency lacking in resources.

December 2019 Tax Update

Have income from rental properties you own? You may be eligible to take a juicy tax break:

The 20% qualified business income deduction., Subject to a litany of rules, self-employed individuals and owners of S corporations, partnerships and LLCs can write off 20% of their qualified business income. QBI is your allocable share of income less deductions from a trade or business. It doesn’t include wages, dividends, capital gain or loss, interest income, etc. Eligible filers take the break on their 1040 return.  

Applying the QBI rules to rentals is complicated. The rental activity must generally rise to the level of a trade or business.  For this purpose, IRS regs refer to the standard under federal tax code Section 162, the statute that generally governs the deductibility of trade or business expenses. There is no statutory or regulatory definition of a Section 162 trade or business. Instead, this determination is based on a taxpayer’s specific facts and circumstances.  

This analysis is somewhat unclear in the context of a realty rental activity, though the QBI regs point out some factors: Type of property (commercial or residential), extent of day-to-day involvement by the lessor or the lessor’s agent, lease terms, number of properties rented out and other ancillary services provided under the lease.

 Owners of rental real estate have a safe harbor to mitigate the uncertainty.  If met, you can treat the rental as a trade or business for QBI purposes.  At least 250 hours must be devoted to the rental activity by the taxpayer, employees or independent contractors in a year. For realty owned four years or more, the 250-hour requirement must be satisfied in three of the five most recent years.  Time spent on repairs and maintenance, tenant services, property management,

advertising, collecting rents, negotiating leases and supervising workers counts.  Hours put in for arranging financing, constructing long-term capital improvements, and driving to and from the real estate aren’t included in the 250-hour standard. The safe harbor doesn’t apply to property leased under a triple net lease or personally used by the owner for the greater of 14 days or 10% of the days rented.   Users of the safe harbor must meet strict recordkeeping requirements.

Contemporaneous records must detail hours, dates and descriptions of the services, and who performed them. If the services are done by contractors or employees, the taxpayer must keep logs of the work done by them, as well as proof of payment.  Taxpayers must also attach a statement to their tax return for each year in which they use the safe harbor. See Rev. Proc. 2019-38 for what to include.  

Special rules apply to taxpayers who own multiple rental properties. They can treat each property separately or they can aggregate similar rental activities into commercial or residential categories. Commercial real estate can be aggregated only with other commercial realty. Ditto for residential rentals. Mixed-use property, such as a building with residential and commercial tenants, may be treated as a separate rental activity or bifurcated into commercial and residential property.

Think about contributing all or part of your year-end bonus to your 401(k) or another workplace retirement plan if you haven’t yet put in the maximum.  The 401(k) contribution limit for 2019 is $19,000 ($25,000 if you’re age 50 or older).  Payins are pretax, meaning they’re not hit with federal income tax or payroll taxes.  If you want the extra contribution to count for 2019, it must be done by year-end.

Review your retirement plan beneficiaries, if you haven’t done so recently.  You can help avoid unintended consequences by updating beneficiary designations of your 401(k) or 403(b) plans, annuities, pensions and IRAs to account for life changes such as marriage, divorce or the death of a spouse or other listed beneficiary.  While you’re at it, review the beneficiaries listed in your will and taxable accounts. And if you don’t yet have a will, think about drafting one sooner rather than later.

Check your health flexible spending account. You must clean it out by Dec. 31 if your employer hasn’t implemented the 2½-month grace period or the $500 carryover rule. Otherwise, you will forfeit any money left in your account.

 Eligibility for HSAs is restricted. You must have a high-deductible health plan to qualify. The minimum allowable deductible for 2020 is $2,800 for family coverage and $1,400 for self-only coverage. And out-of-pocket costs, including copayments, can’t exceed $6,900 a year for individual coverage and $13,800 for family coverage.  Expenses for preventive care can be covered dollar for dollar by HDHPs, even if the deductible hasn’t been met. Alternatively, preventive medical costs can be covered by a lower deductible, depending on the terms of the insurance policy. This past summer, IRS relaxed the rules for people with certain chronic illnesses. Some services and drugs for a range of chronic conditions are treated as preventive care that can be covered by HDHPs, including blood pressure monitors for hypertension,

statins for heart disease, and selective serotonin reuptake inhibitors for depression.

People enrolled in Medicare can’t contribute to HSAs. But don’t despair if you have a balance in an existing HSA. Once you turn 65, you can use HSA money on a tax-free basis to pay monthly Medicare premiums. And while you’re on Medicare, you can continue to take tax-free payouts from your HSA for out-of-pocket medicals. HSAs have several major federal tax advantages that owners can enjoy. Contributions to HSAs are deductible or are from pretax wages, up to a limit.

For 2020, the annual cap on contributions to HSAs is $3,550 for self-only coverage and $7,100 for family coverage. People born before 1966 can put in $1,000 more. Excess payins aren’t deductible and are hit with a 6% yearly excise tax until withdrawn. Earnings inside an HSA build up tax-free for the account owner.  HSAs don’t have a use-it-or-lose-it rule, unlike health flexible spending accounts. And any withdrawals that are used to pay medical expenses are not taxed.

Distributions from HSAs for other purposes are taxed and subject to a 20% penalty.

The fine doesn’t apply to account owners who are age 65 or older, disabled or deceased.

Four common tax errors that can be costly for small businesses

A small business owner often wears many different hats. They might have to wear their boss hat one day, and the employee hat the next. When tax season comes around, it might be their tax hat.

They may think of doing their taxes as just another item to quickly cross off their to-do list. However, this approach could leave taxpayers open to mistakes when filing and paying taxes.

Accidentally failing to comply with tax laws, violating tax codes, or filling out forms incorrectly can leave taxpayers and their businesses open to possible penalties. The IRS encourages small businesses to explore using a reputable tax preparer – including certified public accountants, Enrolled Agents or other knowledgeable tax professionals – to help with their tax situation. Filing electronically can also help avoid common errors.

Being aware of common mistakes can also help tame the stress of tax time. Here are a few mistakes small business owners should avoid:

Underpaying estimated taxes
Business owners should generally make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. If they don’t pay enough tax through withholding and estimated tax payments, they may be charged a penalty.

Depositing employment taxes
Business owners with employees are expected to deposit taxes they withhold, plus the employer’s share of those taxes, through electronic fund transfers.  If those taxes are not deposited correctly and on time, the business owner may be charged a penalty.

Filing late
Just like individual returns, business tax returns must be filed in a timely manner. To avoid late filing penalties, taxpayers should be aware of all tax requirements for their type of business the filing deadlines.

Not separating business and personal expenses
It can be tempting to use one credit card for all expenses especially if the business is a sole proprietorship. Doing so can make it very hard to tell legitimate business expenses from personal ones. This could cause errors when claiming deductions and become a problem if the taxpayer or their business is ever audited.       

Here are some common audit triggers:

Taking higher-than-average deductions. IRS may pull a return for audit if the deductions shown are disproportionately large, compared with reported income. Writing off alimony. The rules on deducting alimony are complicated, and IRS knows that some filers who claim this write-off don’t meet the requirements, so it pulls suspicious returns for audit. Look for the agency to closely police this area even more to see whether taxpayers are complying with this change under tax reform: Alimony paid pursuant to post-2018 divorce or separation agreements isn’t deductible.  

Claiming large charitable deductions. Agents are checking whether taxpayers have satisfied the various substantiation requirements, such as filing Form 8283 for noncash donations over $500 or getting an appraisal for highly valuable gifts. Contributions of facade or conservation easements are especially juicy IRS targets.

Running a small business. Both higher-grossing sole proprietorships and smaller ones are on IRS’s radar, because auditors know from experience that some self-employeds claim excessive write-offs and don’t report all their income. Tempting targets include proprietors reporting at least $100,000 of gross receipts on Schedule C, as well as cash-intensive small firms. Big write-offs for meals, transportation and travel are ripe for exam. Also on IRS’s radar are sole proprietors who claim 100% business use of a vehicle. And for post-2017 returns, it’s a sure bet that auditors will check that businesses aren’t deducting entertainment expenses.

Reporting substantial losses or little to no adjusted gross income.

Taxpayers with multiple years of Schedule C losses who also have income from wages or other sources are a valuable audit target for agency examiners. The Revenue Service’s antennas go up even higher for people who attach Schedule C with big losses from ventures that look like hobbies, or from real estate activities. Large losses reported on Schedule E or from asset dispositions get scrutiny, too.

Among the best of the rest:

-Foreign tax credits taken by individuals.

-Filers who take the health premium credit for insurance bought through an exchange or who claim the earned income credit.

-People who invest in or deal in virtual currency.  

-S corporation shareholders who deduct losses in excess of their stock basis and loans that they make to the company.

-Owners of unreported overseas financial accounts.

-U.S. citizens working abroad who claim the foreign earned income exclusion.

If claiming the child credit, be sure your child has a Social Security number.

You must put the SSN on the 1040. There are no exceptions, the Service says in a private memo, not even for taxpayers with a religion-based objection to SSNs.

More Info!

Tapping an IRA before age 59½ to pay higher education costs is penalty-free.

To qualify, the payout must cover costs paid in the year of the withdrawal. Payouts can be used to pay expenses for the IRA owner, spouse, child or grandchild. Note that even if the distribution is exempted from the 10% penalty, income tax is due.  Early payouts from 401(k)s for education don’t normally get penalty-free treatment…

A reminder that donations you make to individuals aren’t tax-deductible. Ditto, generally, for gifts made through personal fund-raising websites that are earmarked for a single person or a small group. This includes contributions made on sites such as to assist with a person’s medical costs, or to help a family who lost their home in a fire or storm. But you can deduct gifts that you make to 501(c)(3) organizations that solicit donations on fund-raising sites.

Non-filing may be a Crime

Very few people are put in jail for not filing a tax return, but it does happen occasionally.  A willful failure to file tax returns is a misdemeanor if you owe taxes.  You can be sentenced for up to a year in jail and a $25,000 fine for each year of non-filing (Internal Revenue Code 7201).  If you failure to file is deemed to be part of a scheme to evade taxes you can be charged with a felony, a more serious crime, which carries a maximum punishment of five years and more sever monetary penalty.  The felony crime requires a deceitful act beyond the non-filing, such as using a fake social security number.  Non-filers may be contacted by the IRS Criminal Investigation Division, or CID.  This does not mean that you will be prosecuted, but you still should get your past due returns prepared and filed.  In deciding whether or not to prosecute a non-filer, the CID considers many factors, such as:

  1.  The number of years you haven’t filed
  2. The amount of taxes due
  3. Your occupation and education
  4. Your previous history of tax delinquencies
  5. Whether or not you are involved in a business that deals with large amounts of cash