New digital asset reporting requirements will be imposed in coming years

The Infrastructure Investment and Jobs Act (IIJA) was signed into law on November 15, 2021. It includes new information reporting requirements that will generally apply to digital asset transactions starting in 2023. Cryptocurrency exchanges will be required to perform intermediary Form 1099 reporting for cryptocurrency transactions.

Existing reporting rules

If you have a stock brokerage account, whenever you sell stock or other securities, you receive a Form 1099-B after the end of the year. Your broker uses the form to report transaction details such as sale proceeds, relevant dates, your tax basis and the character of gains or losses. In addition, if you transfer stock from one broker to another broker, the old broker must furnish a statement with relevant information, such as tax basis, to the new broker.

Digital asset broker reporting

The IIJA expands the definition of brokers who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person (“crypto exchanges”). Thus, any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS after the end of each year.

Transfer reporting

Sometimes you may have a transfer transaction that isn’t a sale or exchange. For example, if you transfer cryptocurrency from your wallet at one crypto exchange to your wallet at another crypto exchange, the transaction isn’t a sale or exchange. For that transfer, as with stock, the old crypto exchange will be required to furnish relevant digital asset information to the new crypto exchange. Additionally, if the transfer is to an account maintained by a party that isn’t a crypto exchange (or broker), the IIJA requires the old crypto exchange to file a return with the IRS. It’s anticipated that such a return will include generally the same information that’s furnished in a broker-to-broker transfer.

Digital asset definition

For the reporting requirements, a “digital asset” is any digital representation of value that’s recorded on a cryptographically secured distributed ledger or similar technology. (The IRS can modify this definition.) As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Cash transaction reporting

You may know that when a business receives $10,000 or more in cash in a transaction, it is required to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA will require businesses to treat digital assets like cash for purposes of this requirement.

When reporting begins

These reporting rules will apply to information reporting that’s due after December 31, 2023. For Form 1099-B reporting, this means that applicable transactions occurring after January 1, 2023, will be reported. Whether the IRS will refine the form for digital assets, or come up with a new form, is not known yet. Form 8300 reporting of cash transactions will presumably follow the same effective dates.

More details

If you use a crypto exchange, and it hasn’t already collected a Form W-9 from you seeking your taxpayer identification number, expect it to do so. The transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies. And keep in mind that a reporting intermediary doesn’t always have accurate information, especially with a new type of reporting. Contact us with any questions.

© 2021

Gig workers should understand their tax obligations

The number of people engaged in the “gig” or sharing economy has grown in recent years. In an August 2021 survey, the Pew Research Center found that 16% of Americans have earned money at some time through online gig platforms. This includes providing car rides, shopping for groceries, walking dogs, performing household tasks, running errands and making deliveries from a restaurant or store.

There are tax consequences for the people who perform these jobs. Basically, if you receive income from an online platform offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made.

Traits of gig workers

Gig workers are those who are independent contractors and conduct their jobs through online platforms. Examples include Uber, Lyft, Airbnb, Angi, Instacart and DoorDash.

Unlike traditional employees, independent contractors don’t receive benefits associated with employment or employer-sponsored health insurance. They also aren’t covered by the minimum wage or other protections of federal laws, aren’t part of states’ unemployment insurance systems, and are on their own when it comes to training, retirement savings and taxes.

Tax obligations

If you’re part of the gig or sharing economy, here are some considerations.

  • You may need to make quarterly estimated tax payments because your income isn’t subject to withholding. These payments are generally due on April 15, June 15, September 15 and January 15 of the following year. (If a deadline falls on a Saturday or Sunday, the deadline is extended to the next business day.)
  • You should receive a Form 1099-NEC, Nonemployee Compensation, a Form 1099-K or other income statement from the online platform.
  • Some or all of your business expenses may be deductible on your tax return, subject to the normal tax limitations and rules. For example, if you provide rides with your own car, you may be able to deduct depreciation for wear and tear and deterioration of the vehicle. Be aware that if you rent a room in your main home or vacation home, the rules for deducting expenses can be complex.

Diligent recordkeeping

It’s critical to keep good records tracking income and expenses in case you are audited by the IRS or a state/local tax authority. Contact us if you have questions about your tax obligations as a gig worker or the deductions you can claim. You don’t want to get an expensive surprise when you file your tax return next year.

© 2021

Converting a traditional IRA to a Roth IRA can benefit your retirement and estate plans

Retirement planning and estate planning often go hand in hand: The more you save in retirement, the more you’ll have to pass on to the next generation. If you currently have a substantial balance in a traditional IRA, you may be considering whether you should convert the IRA to a Roth IRA. To answer that question, know that there are estate planning benefits to using a Roth IRA and that now is a good time to make the conversion.

Estate planning benefits

The main difference between a traditional IRA and a Roth IRA is the timing of income taxes. With a traditional IRA, your eligible contributions are deductible on your tax return, but distributions of both contributions and earnings are taxable when you receive them. With a Roth IRA, on the other hand, your contributions are nondeductible — that is, they’re made with after-tax dollars — but qualified distributions of both contributions and earnings are tax-free if you meet certain requirements.

Generally, from a tax perspective, you’re better off with a Roth IRA if you expect your tax rate to be higher when it comes time to withdraw the funds. That’s because you pay the tax up front when your tax rate is lower.

Also, from an estate planning perspective, a Roth IRA has two distinct advantages. First, unlike a traditional IRA, a Roth IRA doesn’t mandate required minimum distributions (RMDs) beginning at age 72. If your other assets are sufficient to meet your living expenses, you can allow the funds in a Roth IRA to continue growing tax-free for the rest of your life, multiplying the amount available for your loved ones. Second, after your death, your children or other beneficiaries can withdraw funds from a Roth IRA tax-free. In contrast, an inherited traditional IRA will come with a sizable income tax bill.

Timing is everything

The Tax Cuts and Jobs Act (TCJA) reduced individual income tax rates from 2018 through 2025. By making the conversion now, the TCJA both enhances the benefits of a Roth IRA and reduces the cost of converting. You’ll have to pay federal taxes when you convert from a traditional IRA to a Roth (and possibly state taxes too). But as previously discussed, Roth IRAs offer tax advantages if you expect your tax rate to be higher in the future.

By temporarily lowering individual income tax rates, the TCJA ensures that your tax rate will increase in 2026 (unless Congress lowers tax rates). Future tax rates are irrelevant, of course, if you plan to hold the funds for life and leave them to your loved ones. In that case, you’re generally better off with a Roth IRA, which avoids RMDs and allows the full balance to continue growing tax-free.

Proceed with caution

If you’re contemplating a Roth IRA conversion, discuss with us the costs, benefits and potential risks. Bear in mind, too, that certain provisions of the Build Back Better Act currently being discussed by Congress would restrict, and, in some circumstances, eliminate Roth conversions for certain taxpayers. Contact us to help determine if a Roth IRA conversion is right for you.

© 2021

Why a gifting strategy still matters

The IRS recently announced next year’s cost-of-living adjustment amounts. For 2022, the federal gift and estate tax exemption has cracked the $12 million mark: $12.06 million to be exact. Arguably more notable, the annual gift tax exemption has increased by $1,000 to $16,000 per recipient ($32,000 for married couples). It’s adjusted only in $1,000 increments, so it typically increases only every few years.

With the federal gift and estate tax exemption so high, making lifetime gifts to your loved ones may seem less critical than it was in the past. But even if your wealth is well within the exemption amount, a lifetime gifting program offers significant estate planning and personal benefits.

Tax-free gifts

A program of regular tax-free gifts reduces the size of your estate and shields your wealth against potential future estate tax liability. Tax-free gifts include those within the annual gift tax exclusion — for 2021 the exclusion amount is $15,000 per recipient ($30,000 for married couples) — as well as an unlimited amount of direct payments of tuition or medical expenses on another person’s behalf.

Even though estate tax may not seem that important now because it’s not applicable to a vast majority of families, there are no guarantees that a future Congress won’t reduce the exemption amount. Indeed, the gift and estate tax exemption is scheduled to be reduced to an inflation-adjusted $5 million on January 1, 2026. And a provision in an earlier version of the Build Back Better Act currently being discussed by Congress also slashed the exemption amount. However, as of this writing, that provision is no longer included in the bill.

The good news is that lifetime gifts remove assets from your estate, including all future appreciation in value, providing some “insurance” against changes in the law down the road.

Taxable gifts

Taxable gifts — that is, gifts over the annual exclusion amount — may also provide advantages. Although these gifts are subject to tax (or applied against your exemption amount), they can reduce your tax liability by removing future appreciation from your estate.

When contemplating lifetime gifts, be sure to consider income tax implications. Currently, assets transferred at death receive a “stepped-up basis,” meaning that their tax basis increases or decreases to their fair market value amount on the date of death. This would allow your heirs to sell appreciated assets without triggering capital gains taxes.

Assets transferred during life, on the other hand, retain your tax basis, so the recipients could end up with a large tax bill should they sell them.

Beyond taxes

Even if gift-giving offered no tax advantages, there are many nontax benefits to making lifetime gifts. For example, it allows you to help loved ones or transfer business interests to the next generation.

Get with the program

Regardless of your level of wealth and whether you’re likely to be subject to estate tax, making gifts continues to offer substantial tax and nontax benefits. We’d be pleased to help you take advantage of these benefits.

© 2021

Feeling generous at year end? Strategies for donating to charity or gifting to loved ones

As we approach the holidays, many people plan to donate to their favorite charities or give money or assets to their loved ones. Here are the basic tax rules involved in these transactions.

Donating to charity

Normally, if you take the standard deduction and don’t itemize, you can’t claim a deduction for charitable contributions. But for 2021 under a COVID-19 relief law, you’re allowed to claim a limited deduction on your tax return for cash contributions made to qualifying charitable organizations. You can claim a deduction of up to $300 for cash contributions made during this year. This deduction increases to $600 for a married couple filing jointly in 2021.

What if you want to give gifts of investments to your favorite charities? There are a couple of points to keep in mind.

First, don’t give away investments in taxable brokerage accounts that are currently worth less than what you paid for them. Instead, sell the shares and claim the resulting capital loss on your tax return. Then, give the cash proceeds from the sale to charity. In addition, if you itemize, you can claim a full tax-saving charitable deduction.

The second point applies to securities that have appreciated in value. These should be donated directly to charity. The reason: If you itemize, donations of publicly traded shares that you’ve owned for over a year result in charitable deductions equal to the full current market value of the shares at the time the gift is made. In addition, if you donate appreciated stock, you escape any capital gains tax on those shares. Meanwhile, the tax-exempt charity can sell the donated shares without owing any federal income tax.

Donating from your IRA

IRA owners and beneficiaries who’ve reached age 70½ are allowed to make cash donations of up to $100,000 a year to qualified charities directly out of their IRAs. You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. Contact your tax advisor if you’re interested in this type of gift.

Gifting assets to family and other loved ones

The principles for tax-smart gifts to charities also apply to gifts to relatives. That is, you should sell investments that are currently worth less than what you paid for them and claim the resulting tax-saving capital losses. Then, give the cash proceeds from the sale to your children, grandchildren or other loved ones.

Likewise, you should give appreciated stock directly to those to whom you want to give gifts. When they sell the shares, they’ll pay a lower tax rate than you would if they’re in a lower tax bracket.

In 2021, the amount you can give to one person without gift tax implications is $15,000 per recipient. The annual gift exclusion is available to each taxpayer. So if you’re married and make a joint gift with your spouse, the exclusion amount is doubled to $30,000 per recipient for 2021.

Make gifts wisely

Whether you’re giving to charity or loved ones this holiday season (or both), it’s important to understand the tax implications of gifts. Contact us if you have questions about the tax consequences of any gifts you’d like to make.

© 2021

Is a Health Savings Account right for you?

Given the escalating cost of health care, there may be a more cost-effective way to pay for it. For eligible individuals, a Health Savings Account (HSA) offers a tax-favorable way to set aside funds (or have an employer do so) to meet future medical needs. Here are the main tax benefits:

  • Contributions made to an HSA are deductible, within limits,
  • Earnings on the funds in the HSA aren’t taxed,
  • Contributions your employer makes aren’t taxed to you, and
  • Distributions from the HSA to cover qualified medical expenses aren’t taxed.

Who’s eligible?

To be eligible for an HSA, you must be covered by a “high deductible health plan.” For 2021, a high deductible health plan is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. For self-only coverage, the 2021 limit on deductible contributions is $3,600. For family coverage, the 2021 limit on deductible contributions is $7,200. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits can’t exceed $7,000 for self-only coverage or $14,000 for family coverage.

An individual (and the individual’s covered spouse) who has reached age 55 before the close of the year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2021 of up to $1,000.

HSAs may be established by, or on behalf of, any eligible individual.

Deduction limits

You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2021, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $3,600. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,200. Thus, deductible contributions aren’t limited by the amount of the annual deductible under the high deductible health plan.

Also, taxpayers who are eligible individuals during the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.

However, if an individual is enrolled in Medicare, he or she is no longer eligible under the HSA rules and contributions to an HSA can no longer be made.

On a once-only basis, taxpayers can withdraw funds from an IRA, and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the transfer time. The amount transferred is excluded from gross income and isn’t subject to the 10% early withdrawal penalty.

Distributions

HSA Distributions to cover an eligible individual’s qualified medical expenses, or those of his spouse or dependents, aren’t taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65 or in the event of death or disability.

As you can see, HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat complex. Contact us if you have questions.

© 2021

Planning for year-end gifts with the gift tax annual exclusion

As we approach the holidays and the end of the year, many people may want to make gifts of cash or stock to their loved ones. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2021 is $15,000.

The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: This discussion isn’t relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.

Gift-splitting by married taxpayers

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $30,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $180,000 each year to their children and to the children’s spouses ($30,000 for each of six recipients).

If gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $15,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $30,000 exclusion covers total gifts. We can prepare a gift tax return (or returns) for you, if more than $15,000 is being given to a single individual in any year.)

“Unified” credit for taxable gifts

Even gifts that aren’t covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11.7 million for 2021. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else do not count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $15,000 as a gift.

Annual gifts help reduce the taxable value of your estate. There have been proposals in Washington to reduce the estate and gift tax exemption amount, as well as make other changes to the estate tax laws. Making large tax-free gifts may be one way to recognize and address this potential threat. It could help insulate you against any later reduction in the unified federal estate and gift tax exemption.

© 2021

What qualifies as a “coronavirus-related distribution” from a retirement plan?

As you may have heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows “qualified” people to take certain “coronavirus-related distributions” from their retirement plans without paying tax.

So how do you qualify? In other words, what’s a coronavirus-related distribution?

Early distribution basics

In general, if you withdraw money from an IRA or eligible retirement plan before you reach age 59½, you must pay a 10% early withdrawal tax. This is in addition to any tax you may owe on the income from the withdrawal. There are several exceptions to the general rule. For example, you don’t owe the additional 10% tax if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses

New exception

Under the CARES Act, you can take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions aren’t subject to the 10% additional tax that otherwise generally applies to distributions made before you reach age 59½.

What’s more, a coronavirus-related distribution can be included in income in installments over a three-year period, and you have three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you can treat the withdrawal and later recontribution as a totally tax-free rollover.

In new guidance (Notice 2020-50) the IRS explains who qualifies to take a coronavirus-related distribution. A qualified individual is someone who:

  • Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • Experiences adverse financial consequences as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must:
    • Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19;
    • Be unable to work due to a lack of childcare because of COVID-19;
    • Experience a business that he or she owns or operates due to COVID-19 close or have reduced hours;
    • Have pay or self-employment income reduced because of COVID-19; or
    • Have a job offer rescinded or start date for a job delayed due to COVID-19.

Favorable rules

As you can see, the rules allow many people — but not everyone — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions apply. Contact us if you have questions or need assistance.

© 2020

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