Month: October 2020

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Buying and selling mutual fund shares: Avoid these tax pitfalls

If you invest in mutual funds, be aware of some potential pitfalls involved in buying and selling shares.

Surprise sales

You may already have made taxable “sales” of part of your mutual fund investment without knowing it. One way this can happen is if your mutual fund allows you to write checks against your fund investment. Every time you write a check against your mutual fund account, you’ve made a partial sale of your interest in the fund. Thus, except for funds such as money market funds, for which share value remains constant, you may have taxable gain (or a deductible loss) when you write a check. And each such sale is a separate transaction that must be reported on your tax return. Here’s another way you may unexpectedly make a taxable sale. If your mutual fund sponsor allows you to make changes in the way your money is invested — for instance, lets you switch from one fund to another fund — making that switch is treated as a taxable sale of your shares in the first fund.

Recordkeeping carefully

Save all the statements that the fund sends you — not only official tax statements, such as Forms 1099-DIV, but the confirmations the fund sends you when you buy or sell shares or when dividends are reinvested in new shares. Unless you keep these records, it may be difficult to prove how much you paid for the shares, and thus, you won’t be able to establish the amount of gain that’s subject to tax (or the amount of loss you can deduct) when you sell. You also need to keep these records to prove how long you’ve held your shares if you want to take advantage of favorable long-term capital gain tax rates. (If you get a year-end statement that lists all your transactions for the year, you can just keep that and discard quarterly or other interim statements. But save anything that specifically says it contains tax information.) Recordkeeping is simplified by rules that require funds to report the customer’s basis in shares sold and whether any gain or loss is short-term or long-term. This is mandatory for mutual fund shares acquired after 2011, and some funds will provide this to shareholders for shares they acquired earlier, if the fund has the information.

Timing purchases and sales

If you’re planning to invest in a mutual fund, there are some important tax consequences to take into account in timing the investment. For instance, an investment shortly before payment of a dividend is something you should generally try to avoid. Your receipt of the dividend (even if reinvested in additional shares) will be treated as income and increase your tax liability. If you’re planning a sale of any of your mutual fund shares near year-end, you should weigh the tax and the non-tax consequences in the current year versus a sale in the next year. Identify shares you sell If you sell fewer than all of the shares that you hold in the same mutual fund, there are complicated rules for identifying which shares you’ve sold. The proper application of these rules can reduce the amount of your taxable gain or qualify the gain for favorable long-term capital gain treatment.

Contact us if you’d like to find out more about tax planning for buying and selling mutual fund shares. Visit our locations page to find your ATA office.  © 2020

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2020 Q4 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. 

  • Thursday, October 15 If a calendar-year C corporation that filed an automatic six-month extension: File a 2019 income tax return (Form 1120) and pay any tax, interest and penalties due. Make contributions for 2019 to certain employer-sponsored retirement plans. 
  • Monday, November 2 Report income tax withholding and FICA taxes for third quarter 2020 (Form 941) and pay any tax due. (See exception below under “November 10.”) 
  • Tuesday, November 10 Report income tax withholding and FICA taxes for third quarter 2020 (Form 941), if you deposited on time (and in full) all of the associated taxes due. 
  • Tuesday, December 15 If a calendar-year C corporation, pay the fourth installment of 2020 estimated income taxes. 
  • Thursday, December 31 Establish a retirement plan for 2020 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP). 

© 2020

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What’s Next for a Stimulus Bill?

The Senate Republicans’ slimmed-down stimulus bill recently failed to materialize after receiving less than the 60 votes needed to move forward. The “skinny” stimulus bill, with a price tag of only $650 billion, was intended to be a way to quickly inject stimulus into the economy and bypass both the multi-trillion-dollar Republican HEALS Act and the Democratic HEROES Act.

The current stimulus limbo leaves millions of Americans in a position of uncertainty. Four main areas that the Senate bill intended to address but are now up in the air include a second round of stimulus checks and the impact on struggling tenants and homeowners, as well as the long-term unemployed.

Next Round of Stimulus Checks

The first stimulus bill, the CARES Act, sent more than $300 billion in stimulus checks to Americans back in March to help mitigate the effects of COVID-19 slowdowns. While this helped millions, many people’s jobs or businesses remain impaired due to the economic impact of the pandemic, and they are hoping for a second stimulus check to help them get by.

With the failure of the Senate bill and the stalemate in the House, the chances of a second round of checks continues to diminish. On the bright side, the U.S. Treasury noted it is ready to print and mail the checks as soon as something is authorized.

Troubled Tenants and Homeowners

The economic fallout from the pandemic placed many tenants and homeowners in the position of being evicted or foreclosed. The CARES Act from March placed a temporary moratorium on evictions and foreclosures, sparing millions. Following this measure, President Trump issued an executive order in August granting the CDC authority to cease evictions as a measure to prevent the spread of COVID-19. The CDC took this order and announced a stop to all evictions until the end of 2020.

For homeowners with federally backed mortgages, the CARES Act moratoriums on single-family foreclosures were also extended until the end of 2020. Moreover, many states passed laws protecting those without federally backed loans from foreclosure.

For both renters and homeowners, these protections will disappear once we enter 2021 unless the government steps in with new legislation or regulations. Keep in mind that for both renters and mortgage holders, payments are being deferred and not canceled – so ultimately, they will still need to make the payments.

Long-Term Unemployment

Millions remain unemployed due to the pandemic; without federal help, their unemployment benefits will expire soon. The CARES Act gave an additional 13 weeks of benefits on top of the initial 26 weeks of unemployment insurance benefits; however, for those impacted on the front-end of the pandemic, these extended benefits will expire at the end of November.

The Senate bill included $300 per week of benefits through the last week of 2020; however, with this failing and without additional aid to state funds, the long-term unemployed won’t have anything to rely on if Congress does nothing.

Conclusion

Democrats responded with a smaller version of their original second-round stimulus bill, coming in a price tag of $2.2 trillion, down from the original $3.4 trillion. This is likely too high a price tag still to garner Republican support. If nothing happens before the mid-October recess, then we will all be waiting until after the Nov. 3 election.

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IRS Mail Backlog

COVID-19 is causing operational delays for the IRS, as it has with many businesses. An IRS official recently acknowledged that the tax agency is experiencing delays in processing paper returns and other mail due to limited staffing. As of Oct. 2, around 5 million pieces of unopened mail (about half of which are tax returns) remain unopened and are stored at various IRS processing centers. This unopened mail backlog also consists of tax payments and taxpayer correspondence. The IRS said that it will “systemically abate” late-payment penalties for paper checks mailed by the extended July 15 due date, once it has processed all the backlogged mail. Learn more about IRS Operations during COVID-19 here.

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Helpful Articles Tax

Market volatility further complicates tax planning for investments

When it comes to tax planning and your investments, it can be difficult to know where to start. First, tax treatment of investments varies based on a number of factors, such as type of investment, type of income it produces, how long you’ve held it and whether any special limitations or breaks apply. And you need to understand the potential tax consequences of buying, holding and selling a particular investment. Higher-income taxpayers also need to know when higher capital gains tax rates and the NIIT kick in. The Tax Cuts and Jobs Act (TCJA) didn’t repeal the NIIT or change the long-term capital gain rates, but its changes to ordinary income tax rates and tax brackets are having an impact on the tax paid on investments. 

Yet, it’s unwise to make investment decisions based solely on tax consequences — you should consider your investment goals, time horizon, risk tolerance, factors related to the investment itself, fees and charges that apply to buying and selling securities, and your need for cash as well. 

Finally, your portfolio and your resulting tax picture can change quickly because of market volatility. Vigilance is necessary to achieve both your tax and investment goals. 

Being tax-smart with losses

Losses aren’t truly losses until they’re realized — that is, generally until you sell the investment for less than what you paid for it. So while it’s distressing to see an account statement that shows a large loss, the loss won’t affect your current tax situation as long as you still own the investment.

Realized capital losses are netted against realized capital gains to determine capital gains tax liability. If net losses exceed net gains, you can deduct only $3,000 ($1,500 for married taxpayers filing separately) of losses per year against ordinary income (such as wages, self-employment and business income, interest, dividends, and taxable retirement plan distributions). But you can carry forward excess losses until death. In the current market, you may not have enough gains to absorb losses, which could leave you with losses in excess of the annual ordinary-income deduction limit. So think twice before selling an investment at a loss. After all, if you hold on to the investment, it may recover the lost value. In fact, a buy-and-hold strategy works well for many long-term investors because it can minimize the effects of market volatility.

Of course, an investment might continue to lose value. That’s one reason why tax considerations shouldn’t be the primary driver of investment decisions. If you’re ready to divest yourself of a poorly performing stock because, for example, you don’t think its performance will improve or your investment objective or risk tolerance has changed, don’t hesitate solely for tax reasons.

Plus, building up losses for future use could be beneficial. This may be especially true if you have a large investment portfolio, real estate holdings or a closely held business that might generate substantial future gains.

Finally, remember that capital gains distributions from mutual funds can also absorb capital losses.